Quantitative Information – Derivative Financial Instruments
As of
September 30, 2018
and
December 31, 2017
, the fair values of the Company's derivative financial instruments in its Consolidated Balance Sheets were as follows:
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Fair Values of Derivative Instruments
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Assets
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Liabilities
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Balance Sheet
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September 30,
2018
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December 31,
2017
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Balance Sheet
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September 30,
2018
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December 31,
2017
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Classification
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Fair Value
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Fair Value
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Classification
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Fair Value
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Fair Value
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Derivative financial instruments:
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FX Contracts
(a)
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Prepaid expenses and other
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$
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0.1
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$
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0.6
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Accrued Expenses and other
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$
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0.1
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$
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1.9
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2013 Interest Rate Swap
(b)
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Prepaid expenses and other
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—
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—
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Accrued expenses and other
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—
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0.9
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(a)
The fair values of the FX Contracts as of
September 30, 2018
and
December 31, 2017
were measured based on observable market transactions of spot and forward rates as of
September 30, 2018
and
December 31, 2017
, respectively.
(b)
The fair value of the 2013 Interest Rate Swap as of
December 31, 2017
was measured based on the implied forward rate from the U.S. Dollar 3-month LIBOR yield curve as of
December 31, 2017
.
REVLON, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)
The effects of the Company's derivative financial instruments on its Unaudited Consolidated Statements of Operations and Comprehensive (Loss) Income were as follows for the periods presented:
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Derivative Instruments
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Statement of Operations Classification
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Amount of Gain (Loss) Recognized in Net (Loss) Income
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Three Months Ended September 30,
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Nine Months Ended September 30,
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2018
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2017
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2018
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2017
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Derivative financial instruments:
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2013 Interest Rate Swap
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Interest Expense
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$
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—
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$
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(0.9
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)
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$
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(1.2
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)
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$
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(2.9
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)
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FX Contracts
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Foreign currency gain (loss), net
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—
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(2.4
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)
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0.2
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(4.0
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)
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2013 Interest Rate Swap
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Miscellaneous, net
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—
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—
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0.2
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(0.1
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)
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Amount of Gain Recognized in Other Comprehensive (Loss) Income
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Three Months Ended September 30,
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Nine Months Ended September 30,
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2018
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2017
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2018
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2017
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Derivatives previously designated as hedging instruments:
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2013 Interest Rate Swap, net of tax
(a)
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$
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—
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$
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0.6
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$
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0.7
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$
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1.8
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(a)
Net of tax benefits of
nil
and
$0.4 million
for the
three months ended September 30, 2018
and 2017, respectively, and
$0.5 million
and
$1.1 million
for the
nine months ended
September 30, 2018
and
2017
, respectively.
10
. PENSION AND POST-RETIREMENT BENEFITS
The components of net periodic benefit costs for the Company's pension and the other post-retirement benefit plans were as follows for the periods presented:
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Pension Plans
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Other
Post-Retirement Benefit Plans
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Three Months Ended September 30,
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2018
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2017
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2018
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2017
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Net periodic benefit costs:
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Service cost
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$
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0.5
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$
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0.6
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$
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—
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$
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—
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Interest cost
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4.6
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4.9
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0.1
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0.1
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Expected return on plan assets
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(6.9
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)
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(7.1
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)
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—
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—
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Amortization of actuarial loss
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2.4
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2.3
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0.1
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—
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Total net periodic benefit costs
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$
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0.6
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$
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0.7
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$
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0.2
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$
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0.1
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REVLON, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)
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Pension Plans
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Other
Post-Retirement Benefit Plans
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Nine Months Ended September 30,
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2018
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2017
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2018
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2017
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Net periodic benefit costs:
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Service cost
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$
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1.5
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$
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1.9
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$
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—
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$
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—
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Interest cost
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13.9
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14.7
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0.3
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0.3
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Expected return on plan assets
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(20.8
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)
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(21.4
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)
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—
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—
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Amortization of actuarial loss
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6.9
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7.1
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0.3
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0.2
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Curtailment gain
(a)
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—
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(0.8
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)
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—
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—
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Total net periodic benefit costs prior to allocation
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$
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1.5
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$
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1.5
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$
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0.6
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$
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0.5
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Portion allocated to Revlon Holdings
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(0.1
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)
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(0.1
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)
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—
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—
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Total net periodic benefit costs
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$
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1.4
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$
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1.4
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$
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0.6
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$
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0.5
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(a)
As a result of the Elizabeth Arden Acquisition, the Company recognized
$0.8 million
in curtailment gains related to a foreign non-qualified defined benefit plan of Elizabeth Arden for the
nine months ended
September 30, 2017
.
In both the
three months ended September 30,
2018
and
2017
, the Company recognized net periodic benefit cost of
$0.8 million
as a result of slightly lower service costs and interest costs during the
third quarter
of
2018
, offset by higher expected return on plan assets and lower amortization of actuarial loss during the
third quarter
of 2017.
In the
nine months ended
September 30, 2018
, the Company recognized net periodic benefit cost of
$2.0 million
, compared to net periodic benefit cost of
$1.9 million
in the
nine months ended
September 30, 2017
, primarily due to the curtailment gain recognized during the
first nine months
of 2017, partially offset by lower service costs and interest costs during the
first nine months
of
2018
.
Net periodic benefit costs are reflected in the Company's Consolidated Financial Statements as follows for the periods presented:
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Three Months Ended September 30,
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Nine Months Ended September 30,
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2018
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2017
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2018
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2017
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Net periodic benefit costs:
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Cost of sales
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$
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—
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$
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—
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$
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—
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$
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—
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Selling, general and administrative expense
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0.5
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0.7
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1.5
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1.9
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Miscellaneous, net
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0.3
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0.1
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0.5
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—
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Total net periodic benefit costs
(a)
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$
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0.8
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$
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0.8
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$
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2.0
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$
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1.9
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(a)
As a result of the Company's adoption of ASU No. 2017-07 in 2018, the Company presents the service cost component of NPPC and NPPBC in the same income statement line items as other employee compensation costs arising from services rendered during the period (i.e., in cost of sales and SG&A) and presents the other components of NPPC and NPPBC below operating income, in miscellaneous, net.
The Company expects that it will have net periodic benefit cost of approximately
$2.7 million
for its pension and other post-retirement benefit plans for all of 2018, compared with net periodic benefit cost of
$1.5 million
in 2017.
During the
third quarter
of
2018
,
$2.1 million
and
$0.2 million
were contributed to the Company’s pension plans and other post-retirement benefit plans, respectively. During the
first nine months
of
2018
,
$5.5 million
and
$0.6 million
were contributed to the Company’s pension plans and other post-retirement benefit plans, respectively. During
2018
, the Company expects to contribute approximately
$10 million
in the aggregate to its pension and other post-retirement benefit plans.
Relevant aspects of the qualified defined benefit pension plans, non-qualified pension plans and other post-retirement benefit plans sponsored by Products Corporation are disclosed in Note 14, "Pension and Post-Retirement Benefits," to the Consolidated Financial Statements in Revlon's 2017 Form 10-K.
REVLON, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)
11
. INCOME TAXES
The Company's provision for income taxes represents federal, foreign, state and local income taxes. The Company's effective tax rate differs from the applicable federal statutory rate due to the effect of state and local income taxes, tax rates and income in foreign jurisdictions, foreign earnings taxable in the U.S., non-deductible expenses and other items. The Company’s tax provision changes quarterly based on various factors including, but not limited to, the geographical level and mix of earnings; enacted tax legislation; foreign, state and local income taxes; tax audit settlements and the interaction of various global tax strategies.
The Company recorded a benefit from income taxes of
$38.7 million
for the
third quarter
of
2018
and a benefit from income taxes of
$10.8 million
for the
third quarter
of
2017
. The
$27.9 million
increase in the benefit from income taxes was primarily due to: (i) the increased loss from continuing operations before income taxes; (ii) the mix and level of earnings; and (iii) the net impact of changes resulting from the enactment of the Tax Cuts and Jobs Act of 2017 (the "Tax Act"), including (a) the reduction of the U.S. federal income tax rate (which provided for less of a benefit on the Company’s year-to-date loss), (b) the U.S. tax on the Company’s foreign earnings under the GILTI provisions of the Tax Act (adjusted to account for new interpretive regulations issued by the IRS in the third quarter of
2018
(the "New IRS Regs")), (c) the limitation on interest deductions (which resulted in a deferred deduction on which the Company has a full valuation allowance) and (d) a reduced deduction for executive compensation under Section 162(m) of the Internal Revenue Code ("Section 162(m)").
The Company recorded a benefit from income taxes of
$43.1 million
for the
nine months ended
September 30, 2018
and a benefit from income taxes of
$37.8 million
for the
nine months ended
September 30, 2017
. The
$5.3 million
increase in the benefit from income taxes was primarily due to: (i) the increased loss from continuing operations; (ii) the mix and level of earnings; and (iii) the net impact of changes resulting from the enactment of the Tax Act, including (a) the reduction of the U.S. federal income tax rate (which provided for less of a benefit on the Company’s year-to-date loss), (b) the U.S. tax on the Company’s foreign earnings under the GILTI provisions of the Tax Act (adjusted to account for the New IRS Regs), (c) the limitation on interest deductions (which resulted in a deferred deduction on which the Company has a full valuation allowance), and (d) a reduced deduction for executive compensation under Section 162(m), partially offset by a reduction in the liability that had been established in prior periods pursuant to Accounting Principles Board 23, "Indefinite Reinvestment Assertion" ("APB 23").
The Company's effective tax rate for the
three months ended September 30,
2018
was higher than the federal statutory rate of
21%
as a result of nondeductible expenses for interest and executive compensation, as well as the U.S. taxation of the Company’s foreign earnings under the GILTI provisions of the Tax Act (adjusted to account for the New IRS Regs).
The Company's effective tax rate for the
nine months ended September 30,
2018
was lower than the federal statutory rate of
21%
as a result of nondeductible expenses for interest and executive compensation, as well as the U.S. taxation of the Company’s foreign earnings under the GILTI provision of the Tax Act (adjusted to account for the New IRS Regs), partially offset by the reduction in liability under APB 23.
In December 2017, with the enactment of the Tax Act, the U.S. government enacted comprehensive tax reform that made broad and complex changes to the U.S. tax code that affected the Company by, among other things:
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reducing the U.S. federal corporate tax rate;
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•
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requiring a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries;
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•
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imposing a new limitation on the deductibility of interest;
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•
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a general elimination of U.S. federal income taxes on dividends from foreign subsidiaries;
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•
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a new provision designed to tax global intangible low-taxed income ("GILTI");
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•
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increased limitations on the deductibility of certain executive compensation; and
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•
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changes to net operating loss carry-forward periods and annual utilization.
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In accordance with the SEC Staff Accounting Bulletin No. 118,
Income Tax Accounting Implications of the Tax Cut and Jobs Act
("SAB 118"), which provides guidance on accounting for the tax effects of the Tax Act, the Company has recorded provisional adjustments in cases where the Company was able to make reasonable estimates of the effects of elements of the Tax Act for which its analysis is not yet complete. The Company has not recorded any adjustments for elements of the Tax Act for which the Company was not yet able to make reasonable estimates of the impact of those elements, and has continued accounting for such elements under ASC 740,
Income Taxes
("ASC 740"), on the basis of the tax laws in effect before the Tax Act, in accordance with the guidance provided by SAB 118.
As a result of the enactment of the Tax Act, in the year ended December 31, 2017 the Company reduced the carrying value of its federal deferred tax assets to reflect the reduction from 35% to 21% in the U.S. federal income tax rate. As a result, the Company recorded a one-time, non-cash charge of
$47.9 million
in the year ended December 31, 2017. No adjustment was made to this provisional amount during the
first nine months
of 2018. In addition, the Company estimated that it had a net deficit in its non-U.S. earnings subject to the transition tax as of the applicable measurement dates, so in the year ended December 31, 2017
REVLON, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)
the Company did not record a liability for the transition tax. No adjustment was made to this provisional amount during the
first nine months
of
2018
.
While the Company continues to assess the impact on its financial statements of the following elements of the Tax Act, it did record a provisional amount for the impact of these items in the
first nine months
of 2018:
Limitation on the deductibility of interest:
Starting in 2018, the Tax Act limits the Company's deduction for interest to:
•
interest income plus 30% of taxable income before interest, tax, depreciation and amortization for years through 2021; and
•
interest income plus 30% of taxable income before interest and taxes for years 2022 and thereafter.
While any reduction in deductible interest in any year can be carried forward indefinitely and added to the potential interest deduction in subsequent years, the Company has concluded that it is more likely than not that it will not be able to realize a benefit for this carry-forward interest deduction in future years, so it has established a full valuation allowance for the associated deferred tax asset.
GILTI:
The Tax Act creates a new requirement that certain income earned by controlled foreign corporations ("CFC") must be included currently in the taxable income of the CFC's U.S. shareholder. GILTI is the excess of the shareholder’s "net CFC tested income" over the net deemed tangible income return, which is currently defined as the excess of: (1) 10% of the aggregate of the U.S. shareholder’s pro rata share of the qualified business asset investment of each CFC with respect to which it is a U.S. shareholder over (2) the amount of certain interest expense taken into account in the determination of net CFC-tested income. The Company became subject to the GILTI provisions beginning in 2018.
Because of the complexity of the new GILTI tax rules, the Company is continuing to evaluate this provision of the Tax Act and the application of ASC 740. Under U.S. GAAP, the Company is allowed to make an accounting policy choice of either: (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the "period cost method"); or (2) factoring such amounts into the Company’s measurement of its deferred taxes (the "deferred method"). The Company’s selection of an accounting policy with respect to the new GILTI tax rules will depend, in part, on analyzing the Company's global income to determine whether the Company expects to have future U.S. inclusions in taxable income related to GILTI and, if so, what the impact is expected to be. For purposes of the provisional calculations through the
first nine months
of 2018, the Company has used the period cost method. The Company has adjusted its provisional calculation in the third quarter of 2018 to reflect the impact of the New IRS Regs. The Company will continue to assess the appropriateness of this method during the period allowed for under SAB 118.
Executive Compensation Limitation:
The Tax Act expands the definition of covered employee under Section 162(m) and provides that the status as a covered employee continues for all subsequent tax years, including years after the death of the individual, and, among other modifications, repeals the exception for performance-based compensation and commissions from the $1 million deduction limitation, subject to certain transitional "grandfathering" provisions. The Tax Act's transitional guidance allows certain payments made under written and binding agreements entered into prior to November 2, 2017 to be treated as if they were made under the provisions of Section 162(m) that were in effect prior to enactment of the Tax Act. While the Company is in the process of gathering information on existing compensation arrangements for covered employees, as well as assessing the impact of transitional guidance on the realizability of existing deferred tax assets related to compensation arrangements of its covered employees, the tax provision for the
first nine months
of 2018 included a provisional estimate of the impact of Section 162(m), as adjusted in the Tax Act.
APB 23 Indefinite Reinvestment Assertion:
The Company is in the process of assessing the impact of the Tax Act on its indefinite reinvestment assertion and any associated impact on its financial statements. Based on the analysis to date, the Company has concluded that a provisional adjustment can be made to reduce the liability that was established under APB 23 in prior periods. As the Company concludes its analysis, changes to this provisional adjustment may be appropriate.
Net Operating Loss Carry-forward rules:
The Company had
$519.3 million
of federal net operating loss carry-forwards as of December 31, 2017. These carry-forwards have a life of up to
20 years
and can be used to reduce the Company's federal taxable income to zero, potentially eliminating any federal income tax liability for the periods in which they are used. If the Company incurs federal net operating losses in 2018 or subsequent years, such losses would have an unlimited carry-forward period, but they would only be available to offset 80% of the Company's taxable income in any given year.
While the Company has calculated and recorded provisional adjustments for the above items, there are certain aspects of the Tax Act for which the Company's accounting is incomplete, and for which no provisional adjustments have been recorded. The provisional amounts included in tax expense and the associated balance sheet accounts (and related disclosures), as well as the amounts that have not been recorded, are subject to modification within the measurement period provided for in SAB 118.
REVLON, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)
Valuation Allowance:
The Company continually evaluates the available positive and negative evidence to assess the amount of deferred tax assets for which it is more likely than not to realize a benefit. For any deferred tax asset in excess of the amount for which it is more likely than not that the Company will realize a benefit, the Company establishes a valuation allowance. A valuation allowance is a non-cash charge, and it in no way limits the Company's ability to utilize its deferred tax assets, including its ability to utilize tax loss and credit carryforward amounts. As of the third quarter of
2018
, the Company concluded that, based on the weight of the available positive and negative evidence, it does not require a valuation allowance on its federal deferred tax assets, other than those associated with the limitation on the deductibility of interest (as described above). The Company does have a valuation allowance on deferred tax assets associated with its activity in certain U.S., state and foreign jurisdictions. These conclusions regarding the establishment of valuation allowances on the Company's deferred tax assets as of the third quarter of
2018
are consistent with the Company's conclusions on such matters as of the end of 2017. However, if the Company does not generate sufficient taxable income in future periods, its deferred tax assets may not be realizable on a more-likely-than-not basis. In such event, the Company may be required to establish an additional valuation allowance against its deferred tax assets in future periods, which would materially increase the Company's tax expense in the period in which the allowance is recognized and would adversely impact the Company's results of operations and statement of financial condition in such period. The Company will continue to monitor the circumstances that would require it to establish an additional valuation allowance on its deferred tax assets. Accordingly, depending on future evidence that may become available, the Company's assessments regarding its valuation allowance position may change.
12
. ACCUMULATED OTHER COMPREHENSIVE LOSS
A roll-forward of the Company's accumulated other comprehensive loss as of
September 30, 2018
is as follows:
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|
|
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Foreign Currency Translation
|
|
Actuarial (Loss) Gain on Post-retirement Benefits
|
|
Deferred Gain (Loss) - Hedging
|
|
Other
|
|
Accumulated Other Comprehensive Loss
|
Balance at January 1, 2018
|
$
|
(15.0
|
)
|
|
$
|
(212.4
|
)
|
|
$
|
(0.7
|
)
|
|
$
|
(0.3
|
)
|
|
$
|
(228.4
|
)
|
Currency translation adjustment
|
(12.3
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(12.3
|
)
|
Amortization of pension related costs, net of tax of $(0.8) million
(a)
|
—
|
|
|
6.5
|
|
|
—
|
|
|
—
|
|
|
6.5
|
|
Amortization of deferred losses related to the de-designated 2013 Interest Rate Swap, net of tax of $0.5 million
(b)
|
—
|
|
|
—
|
|
|
0.7
|
|
|
—
|
|
|
0.7
|
|
Other comprehensive (loss) income
|
$
|
(12.3
|
)
|
|
$
|
6.5
|
|
|
$
|
0.7
|
|
|
$
|
—
|
|
|
$
|
(5.1
|
)
|
Balance at September 30, 2018
|
$
|
(27.3
|
)
|
|
$
|
(205.9
|
)
|
|
$
|
—
|
|
|
$
|
(0.3
|
)
|
|
$
|
(233.5
|
)
|
(a)
Amounts represent the change in accumulated other comprehensive loss as a result of the amortization of actuarial losses (gains) arising during each year related to the Company’s pension and other post-retirement plans. See Note
10
, "Pension and Post-retirement Benefits," for further discussion of the Company’s pension and other post-retirement plans.
(b)
Represents the after-tax effective portion of the changes in fair value of Products Corporation’s 2013 Interest Rate Swap, which expired in May 2018, net of amounts reclassified into earnings. See Note 13, "Financial Instruments" to the Consolidated Financial Statements in Revlon's 2017 Form 10-K for information regarding the 2013 Interest Rate Swap.
As shown above, other comprehensive income includes changes in the fair value of the 2013 Interest Rate Swap prior to the De-designation Date. As the 2013 Interest Rate Swap expired in May 2018 and had been fully amortized into earnings as of June 30, 2018, there was no activity related to the 2013 Interest Rate Swap for the three months ended
September 30, 2018
. The following is a roll-forward of the amounts reclassified out of accumulated other comprehensive loss into earnings during the
nine months ended
September 30, 2018
:
|
|
|
|
|
|
|
|
2013
Interest Rate Swap
|
Beginning accumulated losses at January 1, 2018
|
|
$
|
(0.7
|
)
|
Reclassifications into earnings (net of $0.5 million tax benefit)
(a)
|
|
0.7
|
|
Ending accumulated losses at September 30, 2018
|
|
$
|
—
|
|
(a)
Reclassified to interest expense.
REVLON, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)
The following is a roll-forward of the amounts reclassified out of accumulated other comprehensive loss into earnings as of the three and
nine months ended
September 30, 2017
:
|
|
|
|
|
|
|
|
2013
Interest Rate Swap
|
Beginning accumulated losses at June 30, 2017
|
|
$
|
(1.8
|
)
|
Reclassifications into earnings (net of $0.4 million tax benefit)
(a)
|
|
0.6
|
|
Ending accumulated losses at September 30, 2017
|
|
$
|
(1.2
|
)
|
|
|
|
|
|
|
|
|
2013
Interest Rate Swap
|
Beginning accumulated losses at January 1, 2017
|
|
$
|
(3.0
|
)
|
Reclassifications into earnings (net of $1.1 million tax benefit)
(a)
|
|
1.8
|
|
Ending accumulated losses at September 30, 2017
|
|
$
|
(1.2
|
)
|
(a)
Reclassified to interest expense.
13
. SEGMENT DATA AND RELATED INFORMATION
Operating Segments
Operating segments include components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker (the Company's "Chief Executive Officer") in deciding how to allocate resources and in assessing the Company's performance. As a result of the similarities in the procurement, manufacturing and distribution processes for the Company’s products, much of the information provided in the Unaudited Consolidated Financial Statements and provided in the segment table below is similar to, or the same as, that reviewed on a regular basis by the Company's Chief Executive Officer. As noted in Note 1, "Description of Business and Summary of Significant Accounting Policies," effective January 1, 2018, the Company operates in
four
new brand-centric reporting segments, in line with its new organizational structure that is operated based on
four
global brand teams. As a result, segment financial data for the three and
nine months ended September 30, 2017
has been recast from what was presented in previous filings and presented under the new organizational structure.
As of
September 30, 2018
, the Company’s operations continue to be organized into the following reportable segments:
|
|
•
|
Revlon
- The Revlon segment is comprised of the Company's flagship Revlon brands. Revlon segment products are primarily marketed, distributed and sold in the mass retail channel, large volume retailers, chain drug and food stores, chemist shops, hypermarkets, general merchandise stores, e-commerce sites, television shopping, department stores, professional hair and nail salons, one-stop shopping beauty retailers, specialty cosmetic stores and perfumeries in the U.S. and internationally under brands such as
Revlon
in color cosmetics;
Revlon ColorSilk
and
Revlon Professional
in hair color;
Revlon
in beauty tools; and
Revlon
in nail color.
|
|
|
•
|
Elizabeth Arden
- The Elizabeth Arden segment is comprised of the Company's Elizabeth Arden branded products. The Elizabeth Arden segment markets, distributes and sells fragrances, skin care and color cosmetics primarily to prestige retailers, department and specialty stores, perfumeries, boutiques, e-commerce sites, the mass retail channel, travel retailers and distributors, as well as direct sales to consumers via its Elizabeth Arden branded retail stores and ElizabethArden.com e-commerce business, in the U.S. and internationally, under brands such as
Elizabeth Arden Ceramide, Prevage, Eight Hour, SUPERSTART, Visible Difference
and
Skin Illuminating
in the Elizabeth Arden skin care brands; and
Elizabeth Arden White Tea, Elizabeth Arden Red Door, Elizabeth Arden 5th Avenue
and
Elizabeth Arden Green Tea
in Elizabeth Arden fragrances.
|
|
|
•
|
Portfolio
- The Company’s Portfolio segment markets, distributes and sells a comprehensive line of premium, specialty and mass products primarily to the mass retail channel, hair and nail salons and professional salon distributors in the U.S. and internationally and large volume retailers, specialty and department stores under brands such as
Almay
and
SinfulColors
in color cosmetics;
CND
in nail polishes and nail enhancements, including
CND Shellac
and
CND Vinylux
nail polishes;
Cutex
nail care products;
Pure Ice
in nail polishes;
American Crew
in men’s grooming products; and
Mitchum
in anti-perspirant deodorants. The Portfolio segment also includes a multi-cultural hair care line consisting of
Creme of Nature
hair care products, which are sold in both professional salons and in large volume retailers and other retailers, primarily in the U.S.; and a body care line under the
Natural Honey
brand and hair color
|
REVLON, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)
line under the
Llongueras
brand (licensed from a third party) that are both sold in the mass retail channel, large volume retailers and other retailers, primarily in Spain.
|
|
•
|
Fragrances
- The Fragrances segment includes the development, marketing and distribution of certain owned and licensed fragrances as well as the distribution of prestige fragrance brands owned by third parties. These products are typically sold to retailers in the U.S. and internationally, including prestige retailers, specialty stores, e-commerce sites, the mass retail channel, travel retailers and other international retailers. The owned and licensed fragrances include brands such as
Juicy Couture, John Varvatos, All Saints, La Perla, Wildfox, Charlie, Curve, Elizabeth Taylor
,
Britney Spears
,
Christina Aguilera
,
Shawn
Mendes
,
Halston,
Ed Hardy
,
Geoffrey Beene
,
Alfred Sung
,
Giorgio Beverly Hills
,
Lucky Brand
,
Paul Sebastian
,
White Shoulders
and
Jennifer Aniston
.
|
The Company's management evaluates segment profit for each of the Company's reportable segments. Effective January 1, 2018, the Company allocates corporate expenses to each reportable segment to arrive at segment profit, as these expenses are now included in the internal measure of segment operating performance. The Company defines segment profit as income from continuing operations before interest, taxes, depreciation, amortization, gains/losses on foreign currency fluctuations, gains/losses on the early extinguishment of debt and miscellaneous expenses. Segment profit also excludes the impact of certain items that are not directly attributable to the reportable segments' underlying operating performance. Such items are shown below in the table reconciling segment profit to consolidated income from continuing operations before income taxes. The Company does not have any material inter-segment sales.
The accounting policies for each of the reportable segments are the same as those described in Note 1, "Description of Business and Summary of Significant Accounting Policies." The Company's assets and liabilities are managed centrally and are reported internally in the same manner as the Unaudited Consolidated Financial Statements; thus, no additional information regarding assets and liabilities of the Company’s reportable segments is produced for the Company's Chief Executive Officer or included in these Unaudited Consolidated Financial Statements.
REVLON, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)
The following table is a comparative summary of the Company’s net sales and segment profit by reportable segment for the periods presented. Prior period amounts have been restated to reflect the current period's presentation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Segment Net Sales:
|
|
|
|
|
|
|
|
Revlon
|
$
|
249.5
|
|
|
$
|
254.5
|
|
|
$
|
736.9
|
|
|
$
|
787.8
|
|
Elizabeth Arden
|
122.1
|
|
|
104.8
|
|
|
333.9
|
|
|
301.6
|
|
Portfolio
|
138.4
|
|
|
147.9
|
|
|
420.5
|
|
|
437.9
|
|
Fragrances
|
145.4
|
|
|
159.3
|
|
|
331.6
|
|
|
379.8
|
|
Total
|
$
|
655.4
|
|
|
$
|
666.5
|
|
|
$
|
1,822.9
|
|
|
$
|
1,907.1
|
|
|
|
|
|
|
|
|
|
Segment Profit:
|
|
|
|
|
|
|
|
Revlon
|
$
|
36.8
|
|
|
$
|
22.4
|
|
|
$
|
75.6
|
|
|
$
|
98.1
|
|
Elizabeth Arden
|
6.6
|
|
|
1.6
|
|
|
2.3
|
|
|
2.3
|
|
Portfolio
|
2.1
|
|
|
7.7
|
|
|
(5.8
|
)
|
|
7.7
|
|
Fragrances
|
26.9
|
|
|
22.0
|
|
|
41.2
|
|
|
38.7
|
|
Total
|
$
|
72.4
|
|
|
$
|
53.7
|
|
|
$
|
113.3
|
|
|
$
|
146.8
|
|
|
|
|
|
|
|
|
|
Reconciliation:
|
|
|
|
|
|
|
|
Total Segment Profit
|
$
|
72.4
|
|
|
$
|
53.7
|
|
|
$
|
113.3
|
|
|
146.8
|
|
Less:
|
|
|
|
|
|
|
|
Depreciation and amortization
|
40.1
|
|
|
37.9
|
|
|
119.4
|
|
|
111.7
|
|
Non-cash stock compensation expense
|
6.3
|
|
|
1.5
|
|
|
14.8
|
|
|
5.9
|
|
Non-Operating items:
|
|
|
|
|
|
|
|
|
|
|
Restructuring and related charges
|
3.8
|
|
|
6.6
|
|
|
14.8
|
|
|
12.3
|
|
Acquisition and integration costs
|
3.4
|
|
|
12.7
|
|
|
12.0
|
|
|
40.2
|
|
Loss on disposal of minority investment
|
—
|
|
|
—
|
|
|
20.1
|
|
|
—
|
|
Oxford SAP disruption-related charges
|
16.5
|
|
|
—
|
|
|
49.6
|
|
|
—
|
|
Elizabeth Arden 2016 Business Transformation Program
|
—
|
|
|
0.1
|
|
|
—
|
|
|
0.8
|
|
Elizabeth Arden inventory purchase accounting adjustment, cost of sales
|
—
|
|
|
—
|
|
|
—
|
|
|
17.2
|
|
Deferred compensation
|
—
|
|
|
0.3
|
|
|
—
|
|
|
2.0
|
|
Operating income (loss)
|
2.3
|
|
|
(5.4
|
)
|
|
(117.4
|
)
|
|
(43.3
|
)
|
Less:
|
|
|
|
|
|
|
|
|
Interest Expense
|
46.4
|
|
|
38.6
|
|
|
129.1
|
|
|
110.3
|
|
Amortization of debt issuance costs
|
3.8
|
|
|
2.3
|
|
|
9.1
|
|
|
6.8
|
|
Foreign currency losses (gains), net
|
1.1
|
|
|
(3.1
|
)
|
|
10.7
|
|
|
(16.8
|
)
|
Miscellaneous, net
|
0.4
|
|
|
0.4
|
|
|
0.6
|
|
|
1.8
|
|
Loss from continuing operations before income taxes
|
$
|
(49.4
|
)
|
|
$
|
(43.6
|
)
|
|
$
|
(266.9
|
)
|
|
$
|
(145.4
|
)
|
As of
September 30, 2018
, the Company had operations established in
27
countries outside of the U.S. and its products are sold throughout the world. Generally, net sales by geographic area are presented by attributing revenues from external customers on the basis of where the products are sold.
REVLON, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)
The following tables present the Company's segment net sales by geography and total net sales by classes of similar products for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2018
|
|
Nine Months Ended September 30, 2018
|
|
Revlon
|
|
Elizabeth Arden
|
|
Portfolio
|
|
Fragrances
|
|
Total
|
|
Revlon
|
|
Elizabeth Arden
|
|
Portfolio
|
|
Fragrances
|
|
Total
|
Geographic Area:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
$
|
123.1
|
|
|
$
|
40.3
|
|
|
$
|
88.1
|
|
|
$
|
99.3
|
|
|
$
|
350.8
|
|
|
$
|
388.2
|
|
|
$
|
96.2
|
|
|
$
|
264.8
|
|
|
$
|
216.9
|
|
|
$
|
966.1
|
|
EMEA*
|
57.9
|
|
|
48.3
|
|
|
40.5
|
|
|
33.2
|
|
|
179.9
|
|
|
166.5
|
|
|
141.4
|
|
|
126.0
|
|
|
81.6
|
|
|
515.5
|
|
Asia
|
28.6
|
|
|
23.2
|
|
|
1.1
|
|
|
3.4
|
|
|
56.3
|
|
|
78.5
|
|
|
71.6
|
|
|
3.1
|
|
|
9.9
|
|
|
163.1
|
|
Latin America*
|
19.9
|
|
|
3.2
|
|
|
6.0
|
|
|
3.4
|
|
|
32.5
|
|
|
49.3
|
|
|
7.9
|
|
|
16.8
|
|
|
10.5
|
|
|
84.5
|
|
Pacific*
|
20.0
|
|
|
7.1
|
|
|
2.7
|
|
|
6.1
|
|
|
35.9
|
|
|
54.4
|
|
|
16.8
|
|
|
9.8
|
|
|
12.7
|
|
|
93.7
|
|
|
$
|
249.5
|
|
|
$
|
122.1
|
|
|
$
|
138.4
|
|
|
$
|
145.4
|
|
|
$
|
655.4
|
|
|
$
|
736.9
|
|
|
$
|
333.9
|
|
|
$
|
420.5
|
|
|
$
|
331.6
|
|
|
$
|
1,822.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2017
|
|
Nine Months Ended September 30, 2017
|
|
Revlon
|
|
Elizabeth Arden
|
|
Portfolio
|
|
Fragrances
|
|
Total
|
|
Revlon
|
|
Elizabeth Arden
|
|
Portfolio
|
|
Fragrances
|
|
Total
|
Geographic Area:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
$
|
116.8
|
|
|
$
|
37.0
|
|
|
$
|
81.5
|
|
|
$
|
108.6
|
|
|
$
|
343.9
|
|
|
$
|
411.9
|
|
|
$
|
99.6
|
|
|
$
|
248.4
|
|
|
$
|
242.5
|
|
|
1,002.4
|
|
EMEA*
|
59.7
|
|
|
40.6
|
|
|
52.5
|
|
|
38.1
|
|
|
190.9
|
|
|
170.0
|
|
|
124.5
|
|
|
148.9
|
|
|
102.0
|
|
|
545.4
|
|
Asia
|
30.2
|
|
|
16.6
|
|
|
2.0
|
|
|
3.0
|
|
|
51.8
|
|
|
81.9
|
|
|
53.7
|
|
|
7.1
|
|
|
11.3
|
|
|
154.0
|
|
Latin America*
|
23.4
|
|
|
3.5
|
|
|
8.2
|
|
|
4.1
|
|
|
39.2
|
|
|
62.4
|
|
|
7.9
|
|
|
23.5
|
|
|
11.9
|
|
|
105.7
|
|
Pacific*
|
24.4
|
|
|
7.1
|
|
|
3.7
|
|
|
5.5
|
|
|
40.7
|
|
|
61.6
|
|
|
15.9
|
|
|
10.0
|
|
|
12.1
|
|
|
99.6
|
|
|
$
|
254.5
|
|
|
$
|
104.8
|
|
|
$
|
147.9
|
|
|
$
|
159.3
|
|
|
$
|
666.5
|
|
|
$
|
787.8
|
|
|
$
|
301.6
|
|
|
$
|
437.9
|
|
|
$
|
379.8
|
|
|
$
|
1,907.1
|
|
* The EMEA region includes Europe, the Middle East, Africa and the Company's international Travel Retail business; the Latin America region includes Mexico; and the Pacific region includes Australia and New Zealand.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Classes of similar products:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Color cosmetics
|
$
|
216.4
|
|
|
33%
|
|
$
|
230.3
|
|
|
35%
|
|
$
|
631.1
|
|
|
35%
|
|
$
|
710.5
|
|
|
37%
|
Fragrance
|
191.7
|
|
|
29%
|
|
199.1
|
|
|
30%
|
|
448.5
|
|
|
25%
|
|
492.0
|
|
|
26%
|
Hair care
|
129.6
|
|
|
20%
|
|
127.5
|
|
|
19%
|
|
391.0
|
|
|
21%
|
|
387.5
|
|
|
20%
|
Beauty care
|
49.7
|
|
|
8%
|
|
57.6
|
|
|
9%
|
|
147.5
|
|
|
8%
|
|
161.1
|
|
|
8%
|
Skin care
|
68.0
|
|
|
10%
|
|
52.0
|
|
|
8%
|
|
204.8
|
|
|
11%
|
|
156.0
|
|
|
8%
|
|
$
|
655.4
|
|
|
|
|
$
|
666.5
|
|
|
|
|
$
|
1,822.9
|
|
|
|
|
$
|
1,907.1
|
|
|
|
REVLON, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)
The following table presents the Company's long-lived assets by geographic area as of
September 30, 2018
and
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
December 31, 2017
|
Long-lived assets, net:
|
|
|
|
|
|
|
United States
|
$
|
1,447.3
|
|
|
84%
|
|
$
|
1,480.1
|
|
|
83%
|
International
|
280.8
|
|
|
16%
|
|
295.6
|
|
|
17%
|
|
$
|
1,728.1
|
|
|
|
$
|
1,775.7
|
|
|
|
14. BASIC AND DILUTED EARNINGS PER COMMON SHARE
Shares used in basic (loss) earnings per share are computed using the weighted-average number of common shares outstanding during each period. Shares used in diluted (loss) earnings per share include the dilutive effect of unvested restricted stock under the Company’s Stock Plan and unvested restricted stock units under the long-term incentive program under the Company’s Stock Plan using the treasury stock method. For the three and
nine months ended
September 30, 2018
, diluted loss per share equals basic loss per share, as the assumed vesting of restricted stock and restricted stock units would have an anti-dilutive effect. As of
September 30, 2018
and
2017
, there were
no
outstanding stock options under the Company's Stock Plan. See Note
17
, "Stock Compensation Plan," for information on certain restricted stock unit awards communicated to employees.
Following are the components of basic and diluted (loss) earnings per common share for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Numerator:
|
|
|
|
|
|
|
|
Loss from continuing operations, net of taxes
|
$
|
(10.7
|
)
|
|
$
|
(32.8
|
)
|
|
$
|
(223.8
|
)
|
|
$
|
(107.6
|
)
|
(Loss) income from discontinued operations, net of taxes
|
(0.4
|
)
|
|
0.4
|
|
|
(0.1
|
)
|
|
1.3
|
|
Net loss
|
$
|
(11.1
|
)
|
|
$
|
(32.4
|
)
|
|
$
|
(223.9
|
)
|
|
$
|
(106.3
|
)
|
Denominator:
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding – Basic
|
52,834,879
|
|
|
52,615,412
|
|
|
52,777,883
|
|
|
52,584,954
|
|
Effect of dilutive restricted stock
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Weighted-average common shares outstanding – Diluted
|
52,834,879
|
|
|
52,615,412
|
|
|
52,777,883
|
|
|
52,584,954
|
|
Basic (loss) earnings per common share:
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
(0.20
|
)
|
|
$
|
(0.62
|
)
|
|
$
|
(4.24
|
)
|
|
$
|
(2.04
|
)
|
Discontinued operations
|
(0.01
|
)
|
|
0.01
|
|
|
—
|
|
|
0.02
|
|
Net loss per common share
|
$
|
(0.21
|
)
|
|
$
|
(0.61
|
)
|
|
$
|
(4.24
|
)
|
|
$
|
(2.02
|
)
|
Diluted (loss) earnings per common share:
|
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
(0.20
|
)
|
|
$
|
(0.62
|
)
|
|
$
|
(4.24
|
)
|
|
$
|
(2.04
|
)
|
Discontinued operations
|
(0.01
|
)
|
|
0.01
|
|
|
—
|
|
|
0.02
|
|
Net loss per common share
|
$
|
(0.21
|
)
|
|
$
|
(0.61
|
)
|
|
$
|
(4.24
|
)
|
|
$
|
(2.02
|
)
|
|
|
|
|
|
|
|
|
Unvested restricted stock and restricted stock unit awards under the Stock Plan
(a)
|
197,667
|
|
|
19,506
|
|
|
165,961
|
|
|
19,486
|
|
|
|
(a)
|
These are outstanding common stock equivalents that were not included in the computation of diluted earnings per common share because their inclusion would have had an anti-dilutive effect.
|
15. CONTINGENCIES
As previously disclosed, following the announcement of the execution of the Elizabeth Arden Merger Agreement, several putative shareholder class action lawsuits and a derivative lawsuit were filed challenging the Merger. In addition to the complaints filed on behalf of plaintiffs Parker, Christiansen, Ross and Stein on July 25, 2016, a lawsuit (Hutson v. Elizabeth Arden, Inc., et al., Case No. CACE-16-013566) (referred to as the "Hutson complaint") was filed in the Seventeenth Judicial Circuit in and for
REVLON, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)
Broward County, Florida (the "Court") against Elizabeth Arden, the members of the board of directors of Elizabeth Arden, Revlon, Products Corporation and Acquisition Sub. In general, the Hutson complaint alleges that: (i) the members of Elizabeth Arden’s board of directors breached their fiduciary duties to Elizabeth Arden’s shareholders with respect to the Merger, by, among other things, approving the Merger pursuant to an unfair process and at an inadequate and unfair price; and (ii) Revlon, Products Corporation and Acquisition Sub aided and abetted the breaches of fiduciary duty by the members of Elizabeth Arden’s board of directors. The plaintiff seeks relief similar to that sought in the Parker case.
By Order dated August 4, 2016, all five cases were consolidated by the Court into a Consolidated Amended Class Action. Thereafter, on August 11, 2016, a Consolidated Amended Class Action Complaint was filed, seeking to enjoin defendants from consummating the Merger and/or from soliciting shareholder votes. To the extent that the Merger was consummated, the Consolidated Amended Class Action Complaint seeks to rescind the Merger or recover rescissory or other compensatory damages, along with costs and fees. The grounds for relief set forth in the Consolidated Amended Class Action Complaint in large part track those grounds as asserted in the five individual complaints, as previously disclosed. Class counsel advised that post-consummation of the Merger they were going to file a Second Consolidated Amended Class Action Complaint. The Second Consolidated Amended Class Action Complaint (which superseded the Consolidated Amended Class Action Complaint) was ultimately filed on or about January 26, 2017. Like the Consolidated Amended Class Action complaint, the grounds for relief set forth in the Second Consolidated Amended Class Action Complaint in large part track those grounds as asserted in the five individual complaints.
The defendants' motions to dismiss the Second Consolidated Amended Class Action Complaint were filed on March 28, 2017. Plaintiffs' response was filed on June 6, 2017 and defendants' replies were filed on July 13, 2017. A hearing on the defendants' motion to dismiss was held on September 19, 2017 and on November 20, 2017, the defendants’ motion was granted and the case was dismissed, with leave to amend under limited circumstances. On December 8, 2017, plaintiffs filed a Third Amended Complaint, seeking relief on the same grounds sought in the First and Second Amended Complaints, but alleged as direct, as opposed to derivative, claims. On January 12, 2018, the defendants once again moved to dismiss. The motion was heard on March 29, 2018 and the parties await a decision. On August 14, 2018, the Court granted the motion and dismissed the Third Amended Complaint, with prejudice. On September 11, 2018, the plaintiffs filed a notice of appeal. The Company continues to believe these allegations are without merit and intends to continue to vigorously defend against them. Additional lawsuits arising out of or relating to the Merger Agreement or the Merger may be filed in the future.
The Company is involved in various other routine legal proceedings incidental to the ordinary course of its business. The Company believes that the outcome of all pending legal proceedings in the aggregate is not reasonably likely to have a material adverse effect on the Company’s business, prospects, results of operations, financial condition and/or cash flows. However, in light of the uncertainties involved in legal proceedings generally, the ultimate outcome of a particular matter could be material to the Company’s operating results for a particular period depending on, among other things, the size of the loss or the nature of the liability imposed and the level of the Company’s income for that particular period.
16. RELATED PARTY TRANSACTIONS
Reimbursement Agreements
Revlon, Products Corporation and MacAndrews & Forbes have entered into reimbursement agreements (the "Reimbursement Agreements") pursuant to which: (i) MacAndrews & Forbes is obligated to provide (directly or through its affiliates) certain professional and administrative services, including, without limitation, employees, to the Company, and to purchase services from third-party providers, such as insurance, legal, accounting and air transportation services, on behalf of the Company, to the extent requested by Products Corporation; and (ii) Products Corporation is obligated to provide certain professional and administrative services, including, without limitation, employees, to MacAndrews & Forbes and to purchase services from third-party providers, such as insurance, legal and accounting services, on behalf of MacAndrews & Forbes, to the extent requested by MacAndrews & Forbes, provided that in each case the performance of such services does not cause an unreasonable burden to MacAndrews & Forbes or Products Corporation, as the case may be.
The Company reimburses MacAndrews & Forbes for the allocable costs of the services that MacAndrews & Forbes purchases for or provides to the Company and for the reasonable out-of-pocket expenses that MacAndrews & Forbes incurs in connection with the provision of such services. MacAndrews & Forbes reimburses Products Corporation for the allocable costs of the services that Products Corporation purchases for or provides to MacAndrews & Forbes and for the reasonable out-of-pocket expenses incurred by Products Corporation in connection with the purchase or provision of such services. Each of the Company, on the one hand, and MacAndrews & Forbes, on the other, has agreed to indemnify the other party for losses arising out of the services provided by it under the Reimbursement Agreements, other than losses resulting from its willful misconduct or gross negligence.
REVLON, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)
The Reimbursement Agreements may be terminated by either party on
90
days' notice. The Company does not intend to request services under the Reimbursement Agreements unless their costs would be at least as favorable to the Company as could be obtained from unaffiliated third parties.
The Company participates in MacAndrews & Forbes' directors and officers liability insurance program (the "D&O Insurance Program"), as well as its other insurance coverages, such as property damage, business interruption, liability and other coverages, which cover the Company, as well as MacAndrews & Forbes and its subsidiaries. The limits of coverage for certain of the policies are available on an aggregate basis for losses to any or all of the participating companies and their respective directors and officers. The Company reimburses MacAndrews & Forbes from time-to-time for their allocable portion of the premiums for such coverage or the Company pays the insurers directly, which premiums the Company believes are more favorable than the premiums that the Company would pay were it to secure stand-alone coverage. Any amounts paid by the Company directly to MacAndrews & Forbes in respect of premiums are included in the amounts paid under the Reimbursement Agreements.
The net activity related to services purchased under the Reimbursement Agreements during the
nine months ended
September 30, 2018
and
2017
was
$0.4 million
and
$3.6 million
, respectively. The purchases during the
nine months ended
September 30, 2018
primarily included third party services purchased by MacAndrews & Forbes. The purchases during the
nine months ended
September 30, 2017
primarily included partial payments made by the Company to MacAndrews & Forbes for premiums related to the Company's allocable portion of the
5
-year renewal of the D&O Insurance Program for the period from January 31, 2017 through January 2020. As of
September 30, 2018
and
December 31, 2017
, a receivable balance of
$0.4 million
and a payable balance of
$0.3 million
, respectively, to MacAndrews & Forbes was included in the Company's Consolidated Balance Sheet for transactions subject to the Reimbursement Agreements.
2018 Senior Line of Credit Facility
See Note
7
, "Long-term Debt," regarding the 2018 Senior Line of Credit Agreement between Products Corporation and MacAndrews & Forbes.
Other
During the
nine months ended
September 30, 2018
and
2017
, the Company engaged several companies in which MacAndrews & Forbes had a controlling interest to provide the Company with various ordinary course business services. These services included processing approximately
$16.9 million
and
$24.4 million
of coupon redemptions for the Company's retail customers for the
nine months ended
September 30, 2018
and
2017
, respectively, for which the Company paid fees of approximately
$0.2 million
for each of the
nine months ended
September 30, 2018
and
2017
, and other similar advertising, coupon redemption and raw material supply services, for which the Company paid fees aggregating to approximately
$0.2 million
and
$0.3 million
for the
nine months ended
September 30, 2018
and
2017
, respectively. The Company believes that its engagement of each of these affiliates was on arm's length terms, taking into account each firm's expertise in its respective field, and that the fees paid were at least as favorable as those available from unaffiliated parties.
17
. STOCK COMPENSATION PLAN
Revlon maintains the Fourth Amended and Restated Revlon, Inc. Stock Plan (the "Stock Plan"), which provides for awards of stock options, stock appreciation rights, restricted or unrestricted stock and restricted stock units ("RSUs") to eligible employees and directors of Revlon and its affiliates, including Products Corporation. An aggregate of
6,565,000
shares were reserved for issuance as Awards under the Stock Plan, of which there remained approximately
2.7 million
shares available for grant as of
September 30, 2018
. In July 2014, the Stock Plan was amended to renew the Stock Plan for a
7
-year renewal term expiring on April 14, 2021.
Long-Term Incentive Program
In September 2018, the Company modified its 2018 long-term incentive program ("LTIP"), granting
811,010
time-based and performance-based RSU awards (the "2018 RSUs"). Half of the 2018 RSUs are time-based RSUs that vest ratably over a
3
-year service period, while the remaining half of the 2018 RSUs are performance-based RSUs that cliff-vest at the completion of the
3
-year performance period.
In addition, the Company modified its 2017 LTIP design to align with the 2018 plan, granting a total of
325,894
time-based and performance-based RSUs (the "2017 RSUs" and together with the 2018 RSUs, the "RSUs"). Half of the 2017 RSUs are time-based RSUs that vest ratably over a
2
-year service period, while the remaining half of the 2017 RSUs are performance-based RSUs that cliff-vest at the completion of the
2
-year performance period.
REVLON, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)
The fair value of the RSUs is determined based on the NYSE closing share price on the grant date.
Time-Based RSUs
The time-based 2018 RSUs vest ratably over a
3
-year service period, with the first tranche of such grants vesting in March 2019, while the time-based 2017 RSUs vest ratably over a
2
-year service period, with the first tranche of such grants vesting in March 2019. During the
nine months ended
September 30, 2018
, shares granted to eligible employees and the weighted-average grant date fair value per share related to the time-based RSUs were as follows:
|
|
|
|
|
|
|
|
Time-Based RSUs
|
|
Weighted-Average Grant Date Fair Value per RSU
|
2018
|
405,505
|
|
|
19.05
|
|
2017
|
162,947
|
|
|
19.70
|
|
The Company recognized compensation expense related to the RSUs of
$2.7 million
for the
nine months ended
September 30, 2018
. As of
September 30, 2018
, the Company had
$8.4 million
of total deferred compensation expense related to non-vested time-based RSUs. The cost is recognized over the vesting period of the awards, as described above. During the
nine months ended
September 30, 2018
, there were
no
time-based RSUs that vested.
Performance-based RSUs
The performance-based portion of the RSUs will vest based on the achievement of certain Company performance metrics. The minimum percentage of the performance-based RSUs that can vest is
0%
, with a target percentage of
100%
and a maximum percentage of
150%
. During the
nine months ended
September 30, 2018
, performance-based RSUs granted to eligible employees and the grant date fair value per share related to the performance-based RSUs were as follows:
|
|
|
|
|
|
|
|
Performance-Based RSUs
|
|
Weighted-Average Grant Date Fair Value per RSU
|
2018
|
405,505
|
|
|
19.05
|
|
2017
|
162,947
|
|
|
19.70
|
|
The Company recognized compensation expense related to the performance-based RSUs of
$2.7 million
for the
nine months ended
September 30, 2018
. As of
September 30, 2018
, the Company had
$8.4 million
of total deferred compensation expense related to non-vested performance-based RSUs, which is recognized over the
3
-year performance cycle of the performance-based 2018 RSUs and
2
years for the performance-based 2017 RSUs. During the
nine months ended
September 30, 2018
, there were
no
performance-based RSUs that vested.
18. SUBSEQUENT EVENTS
On November 9, 2018, the Company announced that it was moving forward with a new 2018 Optimization Program designed to streamline the Company’s operations, reporting structures and business processes, with the objective of maximizing productivity and improving profitability, cash flows and liquidity.
The major initiatives underlying the 2018 Optimization Program include:
|
|
•
|
Optimizing Global Supply Chain
: Realizing manufacturing efficiencies and rationalizing the Company's global warehouse network and office locations to drive greater efficiency, lower its cost base and enhance the Company's speed-to-market capabilities for new innovations;
|
|
|
•
|
Enhancing In-Market Execution
: Optimizing the Company's commercial and organizational structures to create more efficient global and regional capabilities;
|
|
|
•
|
Reducing Overhead Costs and Streamlining Functions:
Streamlining functions and workflows by leveraging technology and shared services and standardizing and simplifying the Company's business processes, leading to greater agility and faster decision-making.
|
REVLON, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(except where otherwise noted, all tabular amounts in millions, except share and per share amounts)
In connection with implementing the 2018 Optimization Program, the Company expects to recognize approximately
$30 million
to
$40 million
of total pre-tax restructuring and related charges, consisting of employee-related costs, such as severance, pension and other termination costs, as well as related third party expenses. The Company also expects to incur approximately
$10 million
of additional capital expenditures. Of the restructuring charges, the Company expects that it will record in the fourth quarter of 2018 an estimated pre-tax restructuring charge of approximately
$8 million
to
$10 million
, with the balance to be recognized in 2019. Approximately
85%
of the restructuring charges are expected to be paid in cash, with approximately
$6 million
to
$8 million
expected to be paid in 2018 and
$20 million
to
$26 million
in 2019.
REVLON, INC AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(all tabular amounts in millions, except share and per share amounts)
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Overview of the Business
Revlon, Inc. ("Revlon" and together with its subsidiaries, the "Company") conducts its business exclusively through its direct wholly-owned operating subsidiary, Revlon Consumer Products Corporation ("Products Corporation"), and its subsidiaries. Revlon is an indirect majority-owned subsidiary of MacAndrews & Forbes Incorporated (together with certain of its affiliates other than the Company, "MacAndrews & Forbes"), a corporation wholly-owned by Ronald O. Perelman.
Effective January 1, 2018, the Company operates in
four
new brand-centric reporting segments that are aligned with its new organizational structure based on
four
global brand teams: Revlon; Elizabeth Arden; Portfolio; and Fragrances. The Company manufactures, markets and sells an extensive array of beauty and personal care products worldwide, including color cosmetics; fragrances; skin care; hair color, hair care and hair treatments; beauty tools; men's grooming products; anti-perspirant deodorants; and other beauty care products.
Overview of Net Sales and Earnings Results
Consolidated net sales in the
third quarter
of
2018
were
$655.4 million
, a
$11.1 million
decrease
, or
1.7%
, as compared to
$666.5 million
in the
third quarter
of
2017
. Excluding the
$11.6 million
unfavorable
impact of foreign currency fluctuations (referred to herein as "FX," "XFX" or on an "XFX basis"), consolidated net sales
increased
by
$0.5 million
, or
0.1%
, during the
third quarter
of
2018
. The XFX
increase
in the
third quarter
of
2018
was primarily due to: a
$19.4 million
, or
18.5%
,
increase
in Elizabeth Arden segment net sales; partially offset by a
$12.3 million
, or
7.7%
,
decline
in Fragrances segment net sales; and a
$6.7 million
, or
4.5%
,
decline
in Portfolio segment net sales.
Consolidated net sales in
the first nine months
of
2018
were
$1,822.9 million
, a
$84.2 million
decrease
, or
4.4%
, compared to
$1,907.1 million
in
the first nine months
of
2017
. Excluding the
$16.6 million
favorable
impact of foreign currency fluctuations, consolidated net sales
decreased
by
$100.8 million
, or
5.3%
, during
the first nine months
of
2018
. The XFX
decrease
in
the first nine months
of
2018
was due to: a
$56.3 million
, or
7.1%
,
decline
in Revlon segment net sales; a
$50.6 million
, or
13.3%
,
decline
in Fragrances segment net sales; and a
$20.1 million
, or
4.6%
,
decline
in Portfolio segment net sales; partially offset by a
$26.2 million
, or
8.7%
,
increase
in Elizabeth Arden segment net sales.
Consolidated loss from continuing operations, net of taxes, in the
third quarter
of
2018
was
$10.7 million
, compared to consolidated loss from continuing operations, net of taxes, of
$32.8 million
in the
third quarter
of
2017
. The
$22.1 million
decrease in consolidated loss from continuing operations, net of taxes, in the
third quarter
of
2018
was primarily due to:
|
|
•
|
a
$27.9 million
increase in the benefit from income taxes, primarily due to: (i) increased loss from continuing operations; (ii) the mix and level of earnings; and (iii) the net impact of changes resulting from the enactment of the Tax Cuts and Jobs Act of 2017 (the “Tax Act”), including (a) the reduction of the U.S. federal income tax rate (which provided for less of a benefit on the Company’s year-to-date loss), (b) the U.S. tax on the Company’s foreign earnings under the GILTI provisions of the Tax Act (adjusted to account for new interpretive regulations issued by the IRS in the third quarter of 2018 (the "New IRS Regs")), (c) the limitation on interest deductions (which resulted in a deferred deduction on which the Company has a full valuation allowance) and (d) a reduced deduction for executive compensation under Section 162(m) of the Internal Revenue Code ("Section 162(m)");
|
|
|
•
|
$21.5 million
of lower selling, general and administrative ("SG&A") expenses, primarily driven by lower brand support expenses driven by the re-phasing of certain marketing initiatives, lower general and administrative expenses and favorable foreign currency translation, partially offset by higher costs related to product displays, higher severance due to changes in senior executive management and higher distribution costs due to geographic mix; and
|
|
|
•
|
a
$9.3 million
decline in acquisition and integration costs;
|
with the foregoing partially offset by:
|
|
•
|
$25.6 million
of lower gross profit, primarily due to higher cost of sales as a result of increased manufacturing costs and obsolescence;
|
|
|
•
|
a
$7.8 million
increase in interest expense, primarily due to higher average interest rates and higher debt balances resulting from the Asset-Based Term Facility, as defined herein, entered into during the third quarter of 2018, as well as higher borrowings under the 2016 Revolving Credit Facility; and
|
REVLON, INC AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(all tabular amounts in millions, except share and per share amounts)
|
|
•
|
$4.2 million
of unfavorable variance in foreign currency, resulting from
$1.1 million
in foreign currency losses during the
third quarter
of
2018
, as compared to
$3.1 million
of foreign currency gains during the
third quarter
of
2017
.
|
Consolidated loss from continuing operations, net of taxes, in
the first nine months
of
2018
was
$223.8 million
, compared to consolidated loss from continuing operations, net of taxes, of
$107.6 million
in
the first nine months
of
2017
. The
$116.2 million
increase
in consolidated loss from continuing operations, net of taxes, in
the first nine months
of
2018
was primarily due to:
|
|
•
|
$67.0 million
of lower gross profit, primarily due to lower net sales;
|
|
|
•
|
$27.5 million
of unfavorable variance in foreign currency, resulting from
$10.7 million
in foreign currency losses during
the first nine months
of
2018
, compared to
$16.8 million
in foreign currency gains during
the first nine months
of
2017
;
|
|
|
•
|
a
$20.1 million
loss, of which $18.6 million was non-cash, related to the write-off of the Company’s minority investment in a licensee after agreeing to wind-down the contract and revert the trademark rights to the Company following a brief transition period;
|
|
|
•
|
a
$18.8 million
increase in interest expense, primarily due to higher average interest rates and higher debt balances resulting from the Asset-Based Term Facility entered into during the third quarter of 2018, as well as higher borrowings under the 2016 Revolving Credit Facility; and
|
|
|
•
|
$12.6 million
of higher SG&A expenses, primarily driven by unfavorable currency translation, higher costs related to product displays, higher severance due to changes in senior executive management and higher distribution costs due to geographic mix, partially offset by lower brand support expenses, lower recurring expenses and lower incentive compensation;
|
with the foregoing partially offset by:
|
|
•
|
a
$28.2 million
decrease in acquisition and integration costs; and
|
|
|
•
|
a
$5.3 million
increase in the benefit from income taxes, primarily due to: (i) increased loss from continuing operations; (ii) the mix and level of earnings; and (iii) the net impact of changes resulting from the enactment of the Tax Act, including (a) the reduction of the U.S. federal income tax rate (which provided for less of a benefit on the Company’s year-to-date loss), (b) the U.S. tax on the Company’s foreign earnings under the GILTI provisions of the Tax Act (adjusted to account for the New IRS Regs), (c) the limitation on interest deductions (which resulted in a deferred deduction on which the Company has a full valuation allowance) and (d) a reduced deduction for executive compensation under Section 162(m), partially offset by a reduction in the liability that had been established in prior periods pursuant to Accounting Principles Board 23, "Indefinite Reinvestment Assertion" ("APB 23").
|
Net sales in
the first nine months
of
2018
were negatively impacted by service level disruptions that occurred at the Company's Oxford, N.C. manufacturing facility resulting from the launch of a new SAP enterprise resource planning ("ERP") system, as previously disclosed in the Revlon’s 2017 Form 10-K. This launch impacted the Company's ability to manufacture certain quantities of finished goods and fulfill shipments to retail customers in the U.S. and internationally and is estimated to have resulted in approximately
$50 million
of incremental charges incurred in the first nine months of 2018, mainly related to actions that the Company has implemented to remediate the decline in customer service levels. As of
September 30, 2018
, the Oxford, N.C. manufacturing facility was operating at pre-SAP levels and the Company was continuing to re-fill inventories across its retail partners, particularly internationally.
Recent Developments
Foreign Asset-Based Term Loan Credit Agreement
In July 2018, several subsidiaries of Products Corporation entered into an Asset-Based Term Loan Credit Agreement ("Asset-Based Term Facility" and the "Asset-Based Term Agreement," respectively) with Citibank, N.A., acting as administrative agent and collateral agent (the "Agent"). The Asset-Based Term Facility provided the Company with a euro-denominated senior secured asset-based term loan in an aggregate principal amount of
€77 million
. The Asset-Based Term Agreement requires the maintenance of a borrowing base, calculated based on the sum of: (i) 85% of eligible accounts receivable; and (ii) 90% of the net orderly liquidation value of eligible inventory, in each case with respect to certain of Products Corporation’s subsidiaries organized in Australia, Bermuda, Germany, Italy, Spain and Switzerland. To the extent that loans outstanding under the Asset-Based Term Facility exceed the borrowing base, the borrowers must prepay loans, subject to certain conditions. See Note
7
,
"
Long Term Debt
"
for additional information regarding the Asset-Based Term Facility.
REVLON, INC AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(all tabular amounts in millions, except share and per share amounts)
Classification of Argentina's Economy as Highly Inflationary
In May 2018, the International Practices Task Force of the Center for Audit Quality issued a discussion document reporting that Argentina's 3-year cumulative inflation rate exceeded 100%. As a result, Argentina was considered highly inflationary in accordance with U.S. GAAP by no later than June 30, 2018. Consequently, the Company began to account for the operations of its Argentinian affiliate as highly inflationary and treat the U.S. dollar as the functional currency of this affiliate, effective July 1, 2018. This change in functional currency did not have a material impact on the Company’s results of operations, financial condition and/or financial statement disclosures for the period ended September 30, 2018.
2018 Senior Line of Credit Facility
In
June 2018
, Products Corporation entered into a 2018 Senior Unsecured Line of Credit Agreement (the "2018 Senior Line of Credit Agreement") providing Products Corporation with a
$50 million
senior unsecured line of credit facility (the "2018 Senior Line of Credit Facility") from MacAndrews & Forbes Incorporated, Revlon’s majority stockholder. The 2018 Senior Line of Credit Facility allows Products Corporation to request loans thereunder and to use the proceeds of such loans for working capital and other general corporate purposes until the facility matures on
December 31, 2018
. See Note
7
,
"
Long Term Debt
"
for additional information regarding the 2018 Senior Line of Credit Facility.
April 2018 Amendment to 2016 Revolving Credit Facility
In April 2018, Products Corporation entered into an amendment and restatement to the Original 2016 Revolving Credit Agreement with Citibank, N.A., acting as administrative agent, collateral agent, issuing lender, local fronting lender and swingline lender and the other issuing lenders (the "Revolver Amendment," and the Original 2016 Revolving Credit Agreement, as amended by the Revolver Amendment, the "2016 Revolving Credit Agreement," and together with the 2016 Term Loan Agreement being the "2016 Credit Agreements"). Pursuant to the Revolver Amendment, a new
$41.5 million
senior secured first in, last out tranche (the "Tranche B") was established under the 2016 Revolving Credit Agreement and the existing $400 million tranche under the Original 2016 Revolving Credit Facility (and as in effect after the Revolver Amendment, the "2016 Revolving Credit Facility," and together with the 2016 Term Loan Facility, being the "2016 Senior Credit Facilities") became a senior secured last in, first out tranche (the "Tranche A," and together with the Tranche B, the "Tranches"). As a result of the Revolver Amendment, the borrowing base under the 2016 Revolving Credit Facility was increased to approximately
$385 million
. See Note
7
,
"
Long Term Debt
"
for additional information regarding the Revolver Amendment, as well as an updated description of Product Corporation's 2016 Senior Credit Facilities, after giving effect to the Revolver Amendment.
Operating Segments
The Company operates in four reporting segments: Revlon; Elizabeth Arden; Portfolio; and Fragrances:
|
|
•
|
Revlon
- The Revlon segment is comprised of the Company's flagship Revlon brands. Revlon segment products are primarily marketed, distributed and sold in the mass retail channel, large volume retailers, chain drug and food stores, chemist shops, hypermarkets, general merchandise stores, e-commerce sites, television shopping, department stores, professional hair and nail salons, one-stop shopping beauty retailers, specialty cosmetic stores and perfumeries in the U.S. and internationally under brands such as
Revlon
in color cosmetics;
Revlon ColorSilk
and
Revlon Professional
in hair color;
Revlon
in beauty tools; and
Revlon
in nail color.
|
|
|
•
|
Elizabeth Arden
- The Elizabeth Arden segment is comprised of the Company's Elizabeth Arden branded products. The Elizabeth Arden segment markets, distributes and sells fragrances, skin care and color cosmetics primarily to prestige retailers, department and specialty stores, perfumeries, boutiques, e-commerce sites, the mass retail channel, travel retailers and distributors, as well as direct sales to consumers via its Elizabeth Arden branded retail stores and ElizabethArden.com e-commerce business under brands such as
Elizabeth Arden Ceramide, Prevage, Eight Hour, SUPERSTART, Visible Difference
and
Skin Illuminating
in the Elizabeth Arden skin care brands; and
Elizabeth Arden White Tea, Elizabeth Arden Red Door, Elizabeth Arden 5th Avenue
and
Elizabeth Arden Green Tea
in Elizabeth Arden fragrances.
|
|
|
•
|
Portfolio
- The Company’s Portfolio segment markets, distributes and sells a comprehensive line of premium, specialty and mass products primarily to the mass retail channel, hair and nail salons and professional salon distributors in the U.S. and internationally and large volume retailers, specialty and department stores under brands such as
Almay
and
SinfulColors
in color cosmetics;
CND
in nail polishes and nail enhancements, including
CND Shellac
and
CND Vinylux
nail polishes;
Cutex
in nail care products;
Pure Ice
in nail polishes;
American Crew
in men’s grooming products; and
Mitchum
in anti-perspirant deodorants. The Portfolio segment also includes a multi-cultural hair care line consisting of
Creme of Nature
hair care products, which are sold in both professional salons and in large volume retailers and other retailers, primarily in the U.S.; and a body care line under the
Natural Honey
brand and hair color
|
REVLON, INC AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(all tabular amounts in millions, except share and per share amounts)
line under the
Llongueras
brand (licensed from a third party) that are both sold in the mass retail channel, large volume retailers and other retailers, primarily in Spain.
|
|
•
|
Fragrances
- The Fragrances segment includes the development, marketing and distribution of certain owned and licensed fragrances, as well as the distribution of prestige fragrance brands owned by third parties. These products are typically sold to retailers in the U.S. and internationally, including prestige retailers, specialty stores, e-commerce sites, the mass retail channel, travel retailers and other international retailers. The owned and licensed fragrances include brands such as
Juicy Couture, John Varvatos, All Saints, La Perla, Wildfox, Charlie, Curve, Elizabeth Taylor
,
Britney Spears
,
Christina Aguilera
,
Shawn
Mendes
,
Halston,
Ed Hardy
,
Geoffrey Beene
,
Alfred Sung
,
Giorgio Beverly Hills
,
Lucky Brand
,
Paul Sebastian
,
White Shoulders
and
Jennifer Aniston
.
|
Results of Operations
Consolidated Net Sales:
Third quarter
results:
Consolidated net sales in the
third quarter
of
2018
were
$655.4 million
, a
$11.1 million
decrease
, or
1.7%
, compared to
$666.5 million
in the
third quarter
of
2017
. Excluding the
$11.6 million
unfavorable
FX impact, consolidated net sales
increased
by
$0.5 million
, or
0.1%
, during the
third quarter
of
2018
. The XFX
increase
in the
third quarter
of
2018
was primarily due to: a
$19.4 million
, or
18.5%
,
increase
in Elizabeth Arden segment net sales; partially offset by a
$12.3 million
, or
7.7%
,
decline
in Fragrances segment net sales; and a
$6.7 million
, or
4.5%
,
decline
in Portfolio segment net sales.
Year-to-date-results:
Consolidated net sales in
the first nine months
of
2018
were
$1,822.9 million
, a
$84.2 million
decrease
, or
4.4%
, compared to
$1,907.1 million
in
the first nine months
of
2017
. Excluding the
$16.6 million
favorable
FX impact, consolidated net sales
decreased
by
$100.8 million
, or
5.3%
, during
the first nine months
of
2018
. The XFX net sales
decrease
in
the first nine months
of
2018
was due to: a
$56.3 million
, or
7.1%
,
decline
in Revlon segment net sales; a
$50.6 million
, or
13.3%
,
decline
in Fragrances segment net sales; and a
$20.1 million
, or
4.6%
,
decline
in Portfolio segment net sales; partially offset by a
$26.2 million
, or
8.7%
,
increase
in Elizabeth Arden segment net sales.
See "Segment Results" below for further discussion of net sales by segment.
Segment Results:
The Company's management evaluates segment profit for each of the Company's reportable segments. Effective January 1, 2018, the Company allocates corporate expenses to each reportable segment to arrive at segment profit, as these expenses are now included in the internal measure of segment operating performance. The Company defines segment profit as income from continuing operations before interest, taxes, depreciation, amortization, gains/losses on foreign currency fluctuations, gains/losses on the early extinguishment of debt and miscellaneous expenses. Segment profit also excludes the impact of certain items that are not directly attributable to the segments' underlying operating performance. The Company does not have any material inter-segment sales. For a reconciliation of segment profit to income from continuing operations before income taxes, see Note
13
, "Segment Data and Related Information," to the Unaudited Consolidated Financial Statements in this Form 10-Q.
The following tables provide a comparative summary of the Company's segment results for the periods presented. Prior period amounts have been restated to conform to the current period's presentation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
Segment Profit
|
|
Three Months Ended September 30,
|
|
Change
|
|
XFX Change
(a)
|
|
Three Months Ended September 30,
|
|
Change
|
|
XFX Change
(a)
|
|
2018
|
|
2017
|
|
$
|
|
%
|
|
$
|
|
%
|
|
2018
|
|
2017
|
|
$
|
|
%
|
|
$
|
|
%
|
Revlon
|
$
|
249.5
|
|
|
$
|
254.5
|
|
|
$
|
(5.0
|
)
|
|
(2.0
|
)%
|
|
$
|
0.1
|
|
|
—
|
%
|
|
$
|
36.8
|
|
|
$
|
22.4
|
|
|
$
|
14.4
|
|
|
64.3
|
%
|
|
$
|
15.2
|
|
|
67.9
|
%
|
Elizabeth Arden
|
122.1
|
|
|
104.8
|
|
|
17.3
|
|
|
16.5
|
%
|
|
19.4
|
|
|
18.5
|
%
|
|
6.6
|
|
|
1.6
|
|
|
5.0
|
|
|
N.M.
|
|
|
5.6
|
|
|
N.M.
|
|
Portfolio
|
138.4
|
|
|
147.9
|
|
|
(9.5
|
)
|
|
(6.4
|
)%
|
|
(6.7
|
)
|
|
(4.5
|
)%
|
|
2.1
|
|
|
7.7
|
|
|
(5.6
|
)
|
|
(72.7
|
)%
|
|
(5.6
|
)
|
|
(72.7
|
)%
|
Fragrance
|
145.4
|
|
|
159.3
|
|
|
(13.9
|
)
|
|
(8.7
|
)%
|
|
(12.3
|
)
|
|
(7.7
|
)%
|
|
26.9
|
|
|
22.0
|
|
|
4.9
|
|
|
22.3
|
%
|
|
5.2
|
|
|
23.6
|
%
|
Total
|
$
|
655.4
|
|
|
$
|
666.5
|
|
|
$
|
(11.1
|
)
|
|
(1.7
|
)%
|
|
$
|
0.5
|
|
|
0.1
|
%
|
|
$
|
72.4
|
|
|
$
|
53.7
|
|
|
$
|
18.7
|
|
|
34.8
|
%
|
|
$
|
20.4
|
|
|
38.0
|
%
|
REVLON, INC AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(all tabular amounts in millions, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
Segment Profit
|
|
Nine Months Ended September 30,
|
|
Change
|
|
XFX Change
(a)
|
|
Nine Months Ended September 30,
|
|
Change
|
|
XFX Change
(a)
|
|
2018
|
|
2017
|
|
$
|
|
%
|
|
$
|
|
%
|
|
2018
|
|
2017
|
|
$
|
|
%
|
|
$
|
|
%
|
Revlon
|
$
|
736.9
|
|
|
$
|
787.8
|
|
|
$
|
(50.9
|
)
|
|
(6.5
|
)%
|
|
$
|
(56.3
|
)
|
|
(7.1
|
)%
|
|
$
|
75.6
|
|
|
$
|
98.1
|
|
|
$
|
(22.5
|
)
|
|
(22.9
|
)%
|
|
$
|
(22.2
|
)
|
|
(22.6
|
)%
|
Elizabeth Arden
|
333.9
|
|
|
301.6
|
|
|
32.3
|
|
|
10.7
|
%
|
|
26.2
|
|
|
8.7
|
%
|
|
2.3
|
|
|
2.3
|
|
|
—
|
|
|
—
|
%
|
|
—
|
|
|
—
|
%
|
Portfolio
|
420.5
|
|
|
437.9
|
|
|
(17.4
|
)
|
|
(4.0
|
)%
|
|
(20.1
|
)
|
|
(4.6
|
)%
|
|
(5.8
|
)
|
|
7.7
|
|
|
(13.5
|
)
|
|
(175.3
|
)%
|
|
(13.9
|
)
|
|
(180.5
|
)%
|
Fragrance
|
331.6
|
|
|
379.8
|
|
|
(48.2
|
)
|
|
(12.7
|
)%
|
|
(50.6
|
)
|
|
(13.3
|
)%
|
|
41.2
|
|
|
38.7
|
|
|
2.5
|
|
|
6.5
|
%
|
|
2.6
|
|
|
6.7
|
%
|
Total
|
$
|
1,822.9
|
|
|
$
|
1,907.1
|
|
|
$
|
(84.2
|
)
|
|
(4.4
|
)%
|
|
$
|
(100.8
|
)
|
|
(5.3
|
)%
|
|
$
|
113.3
|
|
|
$
|
146.8
|
|
|
$
|
(33.5
|
)
|
|
(22.8
|
)%
|
|
$
|
(33.5
|
)
|
|
(22.8
|
)%
|
N.M. - Not meaningful
(a)
XFX excludes the impact of foreign currency fluctuations.
Revlon Segment
Third quarter
results:
Revlon segment net sales in the
third quarter
of
2018
were
$249.5 million
, a
$5.0 million
, or
2.0%
,
decrease
, compared to
$254.5 million
in the
third quarter
of
2017
. Excluding the
$5.1 million
unfavorable
FX impact, total Revlon segment net sales were flat compared to the
third quarter
of
2017
, as lower net sales of
Revlon
color cosmetics, primarily internationally due to the Oxford, N.C. service level disruptions, were offset by higher net sales of the brand in North America, as retailers replenish inventory levels.
Revlon segment profit in the
third quarter
of
2018
was
$36.8 million
, a
$14.4 million
, or
64.3%
,
increase
, compared to
$22.4 million
in the
third quarter
of
2017
. Excluding the
$0.8 million
unfavorable
FX impact, Revlon segment profit in the
third quarter
of
2018
increased by
$15.2 million
, compared to the
third quarter
of
2017
. This
increase
was primarily due to lower brand support expenses driven by the re-phasing of certain marketing initiatives.
Year-to-date results:
Revlon segment net sales in
the first nine months
of
2018
were
$736.9 million
, a
$50.9 million
, or
6.5%
,
decrease
, compared to
$787.8 million
in
the first nine months
of
2017
. Excluding the
$5.4 million
favorable
FX impact, total Revlon segment net sales in
the first nine months
of
2018
decrease
d by
$56.3 million
, or
7.1%
, compared to
the first nine months
of
2017
. This
decrease
was driven by the segment's lower net sales of
Revlon
color cosmetics, primarily internationally due to the Oxford, N.C. service level disruptions, in addition to consumption declines in North America for both
Revlon
color cosmetics and
Revlon ColorSilk
hair color.
Revlon segment profit in
the first nine months
of
2018
was
$75.6 million
, a
$22.5 million
, or
22.9%
,
decrease
, compared to
$98.1 million
in
the first nine months
of
2017
. Excluding the
$0.3 million
unfavorable
FX impact, Revlon segment profit in
the first nine months
of
2018
decrease
d by
$22.2 million
, or
22.6%
, compared to
the first nine months
of
2017
. This
decrease
was primarily driven by the segment's lower net sales described above, partially offset by lower brand support expenses.
Elizabeth Arden Segment
Third quarter
results:
Elizabeth Arden segment net sales in the
third quarter
of
2018
were
$122.1 million
, a
$17.3 million
, or
16.5%
, increase, compared to
$104.8 million
in the
third quarter
of
2017
. Excluding the $
2.1 million
unfavorable
FX impact, total Elizabeth Arden net sales in the
third quarter
of
2018
increased by $
19.4 million
, or
18.5%
, compared to the
third quarter
of
2017
. This
increase
was primarily driven primarily by the segment's higher net sales of
Elizabeth Arden
skin care products, including
Ceramide
and
Prevage
, primarily internationally.
Elizabeth Arden segment profit in the
third quarter
of
2018
was
$6.6 million
, compared to a profit of
$1.6 million
in the
third quarter
of
2017
. Excluding the
$0.6 million
unfavorable
FX impact, Elizabeth Arden segment profit in the
third quarter
of
2018
increased by
$5.6 million
, compared to the
third quarter
of
2017
. This increase was primarily driven by the higher net sales, partially offset by the segment's higher distribution costs associated with geographic mix.
REVLON, INC AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(all tabular amounts in millions, except share and per share amounts)
Year-to-date results:
Elizabeth Arden segment net sales in
the first nine months
of
2018
were
$333.9 million
, a
$32.3 million
, or
10.7%
,
increase
, compared to
$301.6 million
in
the first nine months
of
2017
. Excluding the
$6.1 million
favorable
FX impact, Elizabeth Arden net sales in
the first nine months
of
2018
increased by
$26.2 million
, compared to
the first nine months
of
2017
. This increase was primarily driven by the segment's higher net sales of Elizabeth Arden skin care products, including
Ceramide
and
Prevage
, primarily internationally.
Elizabeth Arden segment profit in
the first nine months
of
2018
was flat at
$2.3 million
compared to
the first nine months
of
2017
, as the segment's higher net sales were offset by the segment's higher distribution costs, associated with geographic mix, and higher brand support expenses.
Portfolio Segment
Third quarter
results:
Portfolio segment net sales in the
third quarter
of
2018
were
$138.4 million
, a
$9.5 million
, or
6.4%
,
decrease
, compared to
$147.9 million
in the
third quarter
of
2017
. Excluding the
$2.8 million
unfavorable
FX impact, total Portfolio segment net sales in the
third quarter
of
2018
decreased by
$6.7 million
, or
4.5%
, compared to the
third quarter
of
2017
. This
decrease
was driven primarily by the segment's lower net sales of local and regional brands, partially offset by higher net sales of
Almay
color cosmetics, primarily due to inventory replenishment by retailers, as well as higher net sales of
CND
nail products as a result of
Shellac
nail polish innovation, primarily in North America.
Portfolio segment profit in the
third quarter
of
2018
was
$2.1 million
, a
$5.6 million
decrease
compared to
$7.7 million
of Portfolio segment profit in the
third quarter
of
2017
. This
decrease
was primarily driven by the segment's lower net sales, partially offset by lower brand support expenses.
Year-to-date results:
Portfolio segment net sales in
the first nine months
of
2018
were
$420.5 million
, a
$17.4 million
, or
4.0%
,
decrease
, compared to
$437.9 million
in
the first nine months
of
2017
. Excluding the
$2.7 million
favorable
FX impact, total Portfolio segment net sales in
the first nine months
of
2018
decreased
by
$20.1 million
, or
4.6%
, compared to
the first nine months
of
2017
. This
decrease
was driven primarily by the segment's lower net sales of
Cutex
nail care products,
Mitchum
anti-perspirant deodorant products and
American Crew
men's grooming products, partially offset by higher net sales of
Almay
color cosmetics, following the relaunch of the brand, and
CND
nail products, as a result of
Shellac
nail polish innovation, primarily in North America.
Portfolio segment loss in
the first nine months
of
2018
was
$5.8 million
, a
$13.5 million
decrease
compared to
$7.7 million
of Portfolio segment profit in
the first nine months
of
2017
. Excluding the
$0.4 million
favorable
FX impact, Portfolio segment loss in
the first nine months
of
2018
decrease
d by
$13.9 million
compared to
the first nine months
of
2017
. This
decrease
was primarily driven by the segment's lower net sales, partially offset by lower cost of sales and distribution expenses.
Fragrances Segment
Third quarter
results:
Fragrance segment net sales in the
third quarter
of
2018
were
$145.4 million
, a
$13.9 million
, or
8.7%
,
decrease
, compared to $
159.3 million
in the
third quarter
of
2017
. Excluding the
$1.6 million
unfavorable
FX impact, total Fragrance segment net sales in the
third quarter
of
2018
decreased
by
$12.3 million
, or
7.7%
, compared to the
third quarter
of
2017
. This
decrease
was driven primarily by the segment's loss of certain licenses in 2018, weakness in the North America mass retail channel and lower net sales in the prestige retail channel driven by retail store closures in North America, partially offset by new product launches.
Fragrance segment profit in the
third quarter
of
2018
was
$26.9 million
, a $
4.9 million
, or
22.3%
,
increase
, compared to
$22 million
in the
third quarter
of
2017
. Excluding the
$0.3 million
unfavorable
FX impact, Fragrance segment profit in the
third quarter
of
2018
increased by
$5.2 million
, or
23.6%
, compared to the
third quarter
of
2017
. This
increase
was primarily driven by the segment's realization of cost reductions, principally associated with insourcing production capabilities, and lower brand support expenses, partially offset by the segment's lower net sales.
REVLON, INC AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(all tabular amounts in millions, except share and per share amounts)
Year-to-date results:
Fragrance segment net sales in
the first nine months
of
2018
were
$331.6 million
, a
$48.2 million
, or
12.7%
,
decrease
, compared to
$379.8 million
in
the first nine months
of
2017
. Excluding the
$2.4 million
favorable
FX impact, total Fragrance segment net sales in
the first nine months
of
2018
decreased
by
$50.6 million
, or
13.3%
, compared to
the first nine months
of
2017
. This
decrease
was driven primarily by the segment's loss of certain licenses in 2018 and lower net sales of other licensed fragrances within the mass retail channel.
Fragrance segment profit in
the first nine months
of
2018
was
$41.2 million
, a
$2.5 million
, or
6.5%
,
increase
, compared to
$38.7 million
in
the first nine months
of
2017
. Excluding the
$0.1 million
unfavorable
FX impact, Fragrance segment profit in
the first nine months
of
2018
increase
d by
$2.6 million
, or
6.7%
, compared to
the first nine months
of
2017
. This
increase
was primarily driven by the realization of cost reductions, principally associated with insourcing production capabilities, and lower brand support expenses, partially offset by the segment's lower net sales.
Geographic Results:
The following tables provide a comparative summary of the Company's North America and International net sales for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Change
|
|
XFX Change
(a)
|
|
2018
|
|
2017
|
|
$
|
|
%
|
|
$
|
|
%
|
Revlon
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
$
|
123.1
|
|
|
$
|
116.8
|
|
|
$
|
6.3
|
|
|
5.4
|
%
|
|
$
|
6.8
|
|
|
5.8
|
%
|
International
|
126.4
|
|
|
137.7
|
|
|
(11.3
|
)
|
|
(8.2
|
)%
|
|
(6.7
|
)
|
|
(4.9
|
)%
|
Elizabeth Arden
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
$
|
40.3
|
|
|
$
|
37.0
|
|
|
$
|
3.3
|
|
|
8.9
|
%
|
|
$
|
3.8
|
|
|
10.3
|
%
|
International
|
81.8
|
|
|
67.8
|
|
|
14.0
|
|
|
20.6
|
%
|
|
15.6
|
|
|
23.0
|
%
|
Portfolio
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
$
|
88.1
|
|
|
$
|
81.5
|
|
|
$
|
6.6
|
|
|
8.1
|
%
|
|
$
|
6.9
|
|
|
8.5
|
%
|
International
|
50.3
|
|
|
66.4
|
|
|
(16.1
|
)
|
|
(24.2
|
)%
|
|
(13.6
|
)
|
|
(20.5
|
)%
|
Fragrance
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
$
|
99.3
|
|
|
$
|
108.6
|
|
|
$
|
(9.3
|
)
|
|
(8.6
|
)%
|
|
$
|
(9.0
|
)
|
|
(8.3
|
)%
|
International
|
46.1
|
|
|
50.7
|
|
|
(4.6
|
)
|
|
(9.1
|
)%
|
|
(3.3
|
)
|
|
(6.5
|
)%
|
Total Net Sales
|
$
|
655.4
|
|
|
$
|
666.5
|
|
|
$
|
(11.1
|
)
|
|
(1.7
|
)%
|
|
$
|
0.5
|
|
|
0.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
Change
|
|
XFX Change
(a)
|
|
2018
|
|
2017
|
|
$
|
|
%
|
|
$
|
|
%
|
Revlon
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
$
|
388.2
|
|
|
$
|
411.9
|
|
|
$
|
(23.7
|
)
|
|
(5.8
|
)%
|
|
$
|
(24.0
|
)
|
|
(5.8
|
)%
|
International
|
348.7
|
|
|
375.9
|
|
|
(27.2
|
)
|
|
(7.2
|
)%
|
|
(32.3
|
)
|
|
(8.6
|
)%
|
Elizabeth Arden
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
$
|
96.2
|
|
|
$
|
99.6
|
|
|
$
|
(3.4
|
)
|
|
(3.4
|
)%
|
|
$
|
(3.5
|
)
|
|
(3.5
|
)%
|
International
|
237.7
|
|
|
202.0
|
|
|
35.7
|
|
|
17.7
|
%
|
|
29.7
|
|
|
14.7
|
%
|
Portfolio
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
$
|
264.8
|
|
|
$
|
248.4
|
|
|
$
|
16.4
|
|
|
6.6
|
%
|
|
$
|
16.2
|
|
|
6.5
|
%
|
International
|
155.7
|
|
|
189.5
|
|
|
(33.8
|
)
|
|
(17.8
|
)%
|
|
(36.3
|
)
|
|
(19.2
|
)%
|
Fragrance
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
$
|
216.9
|
|
|
$
|
242.5
|
|
|
$
|
(25.6
|
)
|
|
(10.6
|
)%
|
|
$
|
(25.5
|
)
|
|
(10.5
|
)%
|
International
|
114.7
|
|
|
137.3
|
|
|
(22.6
|
)
|
|
(16.5
|
)%
|
|
(25.1
|
)
|
|
(18.3
|
)%
|
Total Net Sales
|
$
|
1,822.9
|
|
|
$
|
1,907.1
|
|
|
$
|
(84.2
|
)
|
|
(4.4
|
)%
|
|
$
|
(100.8
|
)
|
|
(5.3
|
)%
|
(a)
XFX excludes the impact of foreign currency fluctuations.
REVLON, INC AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(all tabular amounts in millions, except share and per share amounts)
Revlon Segment
Third quarter
results:
North America
In North America, Revlon segment net sales in the
third quarter
of
2018
increased
by
$6.3 million
, or
5.4%
, to
$123.1 million
, compared to
$116.8 million
in the
third quarter
of
2017
. Excluding the
$0.5 million
unfavorable
FX impact, Revlon segment net sales in North America in the
third quarter
of
2018
increased
by
$6.8 million
, or
5.8%
, compared to the
third quarter
of
2017
. This
increase
was primarily due to the segment's higher net sales of
Revlon
color cosmetics as retailers replenish inventory levels, partially offset by the brand's consumption declines within the U.S. mass retail channel.
International
Internationally, Revlon segment net sales in the
third quarter
of
2018
decreased
by
$11.3 million
, or
8.2%
, to
$126.4 million
, compared to
$137.7 million
in the
third quarter
of
2017
. Excluding the
$4.6 million
unfavorable
FX impact, Revlon segment International net sales in the
third quarter
of
2018
decreased
by
$6.7 million
, or
4.9%
, compared to the
third quarter
of
2017
. This
decrease
was driven by the segment's lower net sales of
Revlon
color cosmetics, primarily resulting from the Oxford, N.C. service level disruptions.
Year-to-date results:
North America
In North America, Revlon segment net sales in
the first nine months
of
2018
decreased
by
$23.7 million
, or
5.8%
, to
$388.2 million
, compared to
$411.9 million
in
the first nine months
of
2017
. Excluding the
$0.3 million
favorable
FX impact, Revlon segment net sales in North America in
the first nine months
of
2018
decreased
by
$24.0 million
, or
5.8%
, compared to
the first nine months
of
2017
. This
decrease
was primarily due to the segment's lower net sales of
Revlon
color cosmetics as a result of consumption declines within the U.S. mass retail channel, as well as declines in net sales of
Revlon ColorSilk
hair color.
International
Internationally, Revlon segment net sales in
the first nine months
of
2018
decreased
by
$27.2 million
, or
7.2%
, to
$348.7 million
, compared to
$375.9 million
in
the first nine months
of
2017
. Excluding the
$5.1 million
favorable
FX impact, Revlon segment International net sales in
the first nine months
of
2018
decreased
by
$32.3 million
, or
8.6%
, compared to
the first nine months
of
2017
. This
decrease
was driven primarily by the segment's lower net sales of
Revlon
color cosmetics, primarily resulting from the Oxford, N.C. service level disruptions.
Elizabeth Arden Segment
Third quarter
results:
North America
In North America, Elizabeth Arden segment net sales in the
third quarter
of
2018
increased
by
$3.3 million
, or
8.9%
, to
$40.3 million
, compared to
$37 million
in the
third quarter
of
2017
. Excluding the
$0.5 million
unfavorable
FX impact, Elizabeth Arden segment net sales in North America in the
third quarter
of
2018
increased
by
$3.8 million
, or
10.3%
, compared to the
third quarter
of
2017
. This
increase
was primarily due to the segment's higher net sales of skin care products, partially offset by decreases in the segment's net sales driven by retail store closures.
International
Internationally, Elizabeth Arden segment net sales in the
third quarter
of
2018
increased
by
$14.0 million
, or
20.6%
, to
$81.8 million
, compared to
$67.8 million
in the
third quarter
of
2017
. Excluding the
$1.6 million
unfavorable
FX impact, Elizabeth Arden segment International net sales in the
third quarter
of
2018
increased
by
$15.6 million
, or
23.0%
, compared to the
third quarter
of
2017
. This
increase
was driven primarily by the segment's higher net sales of skin care products within the Company's Travel Retail business and Asia region.
REVLON, INC AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(all tabular amounts in millions, except share and per share amounts)
Year-to-date results:
North America
In North America, Elizabeth Arden segment net sales in
the first nine months
of
2018
decreased
by
$3.4 million
, or
3.4%
, to
$96.2 million
, compared to
$99.6 million
in
the first nine months
of
2017
. Excluding the
$0.1 million
favorable
FX impact, Elizabeth Arden segment net sales in North America in
the first nine months
of
2018
decreased
by
$3.5 million
, or
3.5%
, compared to
the first nine months
of
2017
. This
decrease
was primarily due to decreases in the segment's net sales of
Elizabeth Arden
branded color cosmetics driven primarily by retail store closures, as well as the anniversary of product innovation that benefited the second quarter of 2017, partially offset by higher net sales of the segment's skin care products.
International
Internationally, Elizabeth Arden segment net sales in
the first nine months
of
2018
increased
by
$35.7 million
, or
17.7%
, to
$237.7 million
, compared to
$202.0 million
in
the first nine months
of
2017
. Excluding the
$6.0 million
favorable
FX impact, Elizabeth Arden segment International net sales in
the first nine months
of
2018
increased
by
$29.7 million
, or
14.7%
, compared to
the first nine months
of
2017
. This
increase
was driven primarily by higher net sales of the segment's skin care products, including
Ceramide
and
Prevage
, primarily within the Company's Travel Retail business and Asia region, as well as higher net sales of
Elizabeth Arden
fragrance products, partially offset by net sales declines of
Elizabeth Arden
branded color cosmetics products.
Portfolio Segment
Third quarter
results:
North America
In North America, Portfolio segment net sales in the
third quarter
of
2018
increased
by
$6.6 million
, or
8.1%
, to
$88.1 million
, as compared to
$81.5 million
in the
third quarter
of
2017
. Excluding the
$0.3 million
unfavorable
FX impact, Portfolio segment net sales in North America in the
third quarter
of
2018
increased
by
$6.9 million
, or
8.5%
, compared to the
third quarter
of
2017
. This
increase
was primarily driven by the segment's higher net sales of
Almay
color cosmetics, due to inventory replenishment by retailers, and higher net sales of
CND
nail products as a result of
Shellac
nail polish innovation.
International
Internationally, Portfolio segment net sales in the
third quarter
of
2018
decreased
by
$16.1 million
, or
24.2%
, to
$50.3 million
, compared to
$66.4 million
in the
third quarter
of
2017
. Excluding the
$2.5 million
unfavorable
FX impact, Portfolio segment International net sales
decreased
by
$13.6 million
, or
20.5%
, in the
third quarter
of
2018
, compared to the
third quarter
of
2017
, primarily due to the segment's lower net sales of local and regional brands, as well as the Oxford, N.C. service level disruptions.
Year-to-date results:
North America
In North America, Portfolio segment net sales in
the first nine months
of
2018
increased
by
$16.4 million
, or
6.6%
, to
$264.8 million
, as compared to
$248.4 million
in
the first nine months
of
2017
. Excluding the
$0.2 million
favorable
FX impact, Portfolio segment net sales in North America in
the first nine months
of
2018
increased
by
$16.2 million
, or
6.5%
, compared to
the first nine months
of
2017
. This
increase
was primarily driven by the segment's higher net sales of
Almay
color cosmetics following the relaunch of the brand, as well as higher net sales of
CND
nail products as a result of
Shellac
nail polish innovation, partially offset by the segment's lower net sales of
Cutex
nail care products and
Mitchum
anti-perspirant deodorant products.
International
Internationally, Portfolio segment net sales in
the first nine months
of
2018
decreased
by
$33.8 million
, or
17.8%
, to
$155.7 million
, compared to
$189.5 million
in
the first nine months
of
2017
. Excluding the
$2.5 million
favorable
FX impact, Portfolio segment International net sales
decreased
by
$36.3 million
, or
19.2%
, in
the first nine months
of
2018
, compared to
the first nine months
of
2017
, primarily due to the segment's lower net sales of local and regional brands, as well as the Oxford, N.C. service level disruptions.
REVLON, INC AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(all tabular amounts in millions, except share and per share amounts)
Fragrance Segment
Third quarter
results:
North America
In North America, Fragrance segment net sales in the
third quarter
of
2018
decreased
by
$9.3 million
, or
8.6%
, to
$99.3 million
, as compared to
$108.6 million
in the
third quarter
of
2017
. Excluding the
$0.3 million
unfavorable
FX impact, Fragrance segment net sales in North America in the
third quarter
of
2018
decreased
by
$9.0 million
, or
8.3%
, compared to the
third quarter
of
2017
. This
decrease
was primarily driven by the segment's loss of certain licensed designer and celebrity fragrances, as well as lower net sales in the mass and prestige retail channels.
International
Internationally, Fragrance segment net sales in the
third quarter
of
2018
decreased
by
$4.6 million
, or
9.1%
, to
$46.1 million
, compared to
$50.7 million
in the
third quarter
of
2017
. Excluding the
$1.3 million
unfavorable
FX impact, Fragrance segment International net sales
decreased
by
$3.3 million
, or
6.5%
, in the
third quarter
of
2018
, compared to the
third quarter
of
2017
, primarily due to the segment's loss of certain licensed fragrance brands, partially offset by new product launches.
Year-to-date results:
North America
In North America, Fragrance segment net sales in
the first nine months
of
2018
decreased
by
$25.6 million
, or
10.6%
, to
$216.9 million
, as compared to
$242.5 million
in
the first nine months
of
2017
. Excluding the
$0.1 million
unfavorable
FX impact, Fragrance segment net sales in North America in
the first nine months
of
2018
decreased
by
$25.5 million
, or
10.5%
, compared to
the first nine months
of
2017
. This
decrease
was primarily driven by the segment's loss of certain licensed designer and celebrity fragrances, as well as lower net sales in the mass retail channel.
International
Internationally, Fragrance segment net sales in
the first nine months
of
2018
decreased
by
$22.6 million
, or
16.5%
, to
$114.7 million
, compared to
$137.3 million
in
the first nine months
of
2017
. Excluding the
$2.5 million
favorable
FX impact, Fragrance segment International net sales
decreased
by
$25.1 million
, or
18.3%
, in
the first nine months
of
2018
, compared to
the first nine months
of
2017
, primarily due to the segment's loss of certain licensed fragrance brands.
Gross profit:
The table below shows the Company's gross profit and gross margin for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2018
|
|
2017
|
|
Change
|
|
2018
|
|
2017
|
|
Change
|
Gross profit
|
$
|
350.4
|
|
|
$
|
376.0
|
|
|
$
|
(25.6
|
)
|
|
$
|
1,015.7
|
|
|
$
|
1,082.7
|
|
|
$
|
(67.0
|
)
|
Percentage of net sales
|
53.5
|
%
|
|
56.4
|
%
|
|
(2.9
|
)%
|
|
55.7
|
%
|
|
56.8
|
%
|
|
(1.1
|
)%
|
Third quarter
results:
Gross profit
decrease
d by
$25.6 million
in the
third quarter
of
2018
, as compared to the
third quarter
of
2017
. Gross profit as a percentage of net sales (i.e., gross margin)
decrease
d in the
third quarter
of
2018
by
2.9
percentage points, compared to the
third quarter
of
2017
. The drivers of the
decrease
in gross margin in the
third quarter
of
2018
, as compared to the
third quarter
of
2017
, primarily included:
|
|
•
|
the impact of additional costs related to the service level disruptions at the Company's Oxford, N.C. manufacturing facility, which decreased gross margin by 4.4 percentage points;
|
|
|
•
|
higher inventory obsolescence reserves, which decreased gross margin by 2.2 percentage points;
|
|
|
•
|
unfavorable foreign currency fluctuations, which decreased gross margin by 2.0 percentage points; and
|
|
|
•
|
higher manufacturing costs, which decreased gross margin by 1.3 percentage points;
|
REVLON, INC AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(all tabular amounts in millions, except share and per share amounts)
with the foregoing offset by:
|
|
•
|
lower sales returns reserves, which increased gross margin by 3.4 percentage points;
|
|
|
•
|
cost reductions associated with insourcing production capabilities, which increased gross margin by 2.3 percentage points; and
|
|
|
•
|
additional inventory costs in the third quarter of 2017 related to the increase in the fair value of inventory acquired in the Elizabeth Arden Acquisition, that did not recur in the third quarter of 2018, resulting in an increase in gross margin of 1.1 percentage points.
|
Unfavorable sales volume decreased gross profit in the second quarter of 2018 by approximately $7 million, compared to the
third quarter
of 2017, with no impact on gross margin.
Year-to-date results:
Gross profit
decrease
d by
$67.0 million
in
the first nine months
of
2018
, as compared to
the first nine months
of
2017
. Gross margin in
the first nine months
of
2018
decreased by
1.1
percentage points, as compared to
the first nine months
of
2017
. The drivers of the decrease in gross margin in
the first nine months
of
2018
, as compared to
the first nine months
of
2017
, primarily included:
|
|
•
|
the impact of additional costs related to the service level disruptions at the Company's Oxford, N.C. manufacturing facility, which decreased gross margin by 10.2 percentage points;
|
|
|
•
|
higher inventory obsolescence reserves, which decreased gross margin by 4.0 percentage points;
|
|
|
•
|
higher sales allowances, which decreased gross margin by 1.2 percentage points; and
|
|
|
•
|
unfavorable product mix, which increased gross margin by 0.9 percentage points;
|
with the foregoing offset by:
|
|
•
|
cost reductions associated with insourcing production capabilities, which increased gross margin by 4.9 percentage points;
|
|
|
•
|
additional inventory costs in the first nine months of 2017 related to the increase in the fair value of inventory acquired in the Elizabeth Arden Acquisition, that did not recur in the first nine months of 2018, resulting in an increase in gross margin of 3.5 percentage points;
|
•
lower sales returns, which increased gross margin by 2.6 percentage points; and
•
favorable foreign currency fluctuations, which increased gross margin by 1.7 percentage points.
Unfavorable sales volume decreased gross profit in the first six months of 2018 by approximately $82 million, compared to the first six months of 2017, with no impact on gross margin.
SG&A expenses:
The table below shows the Company's SG&A expenses for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2018
|
|
2017
|
|
Change
|
|
2018
|
|
2017
|
|
Change
|
SG&A expenses
|
$
|
340.8
|
|
|
$
|
362.3
|
|
|
$
|
(21.5
|
)
|
|
$
|
1,087.1
|
|
|
$
|
1,074.5
|
|
|
$
|
12.6
|
|
SG&A expenses
decreased
by $
21.5 million
in the
third quarter
of
2018
, compared to the
third quarter
of
2017
, primarily driven by:
|
|
•
|
a $28.8 million decrease in brand support expenses driven by the re-phasing of certain marketing initiatives, primarily within the Revlon segment; and
|
|
|
•
|
$4.8 million of favorable FX impacts;
|
with the foregoing offset by:
|
|
•
|
higher general and administrative expenses of approximately $3.5 million, primarily driven by higher incentive compensation, mainly due to timing, and higher severance costs, partially offset by lower travel expenses;
|
|
|
•
|
higher product display costs, primarily within the Revlon segment; and
|
|
|
•
|
higher distribution costs, primarily due to geographic mix.
|
REVLON, INC AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(all tabular amounts in millions, except share and per share amounts)
SG&A expenses
increased
by
$12.6 million
in
the first nine months
of
2018
, compared to
the first nine months
of
2017
, primarily driven by:
|
|
•
|
$12.7 million of unfavorable FX impacts;
|
|
|
•
|
higher general and administrative expenses of approximately $11 million, primarily driven by higher severance costs and higher professional fees, partially offset by lower travel expenses and lower incentive compensation;
|
|
|
•
|
higher product display costs, primarily within the Revlon segment; and
|
|
|
•
|
higher distribution costs, primarily due to geographic mix;
|
with the foregoing offset by:
|
|
•
|
a $29.3 million decrease in brand support expenses driven by the re-phasing of certain marketing initiatives, primarily within the Revlon segment.
|
Acquisition and Integration Costs:
The table below shows the Company's acquisition and integration costs for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2018
|
|
2017
|
|
Change
|
|
2018
|
|
2017
|
|
Change
|
Acquisition Costs
|
$
|
—
|
|
|
$
|
0.8
|
|
|
$
|
(0.8
|
)
|
|
$
|
0.1
|
|
|
$
|
2.8
|
|
|
$
|
(2.7
|
)
|
Integration Costs
|
3.4
|
|
|
11.9
|
|
|
(8.5
|
)
|
|
11.9
|
|
|
37.4
|
|
|
(25.5
|
)
|
Total acquisition and integration costs
|
$
|
3.4
|
|
|
$
|
12.7
|
|
|
$
|
(9.3
|
)
|
|
$
|
12.0
|
|
|
$
|
40.2
|
|
|
$
|
(28.2
|
)
|
The Company incurred
$3.4 million
of integration costs in the
third quarter
of
2018
as a result of the Company's integration of Elizabeth Arden's operations into the Company's business, including professional fees and employee-related costs.
The Company incurred
$12.7 million
of acquisition and integration costs in the
third quarter
of
2017
, primarily related to the Elizabeth Arden Acquisition.
The Company incurred
$12.0 million
of acquisition and integration costs in
the first nine months
of
2018
, consisting primarily of
$11.9 million
of integration costs related to the integration of Elizabeth Arden and
$0.1 million
of acquisition costs. The integration costs consisted of non-restructuring costs related to the Company's integration of Elizabeth Arden's operations into the Company's business, including professional fees and employee-related costs.
The Company incurred
$40.2 million
of acquisition and integration costs in
the first nine months
of
2017
, primarily related to the Elizabeth Arden Acquisition.
Restructuring charges and other, net:
The table below shows the Company's restructuring charges and other, net for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2018
|
|
2017
|
|
Change
|
|
2018
|
|
2017
|
|
Change
|
Restructuring charges and other, net
|
$
|
3.9
|
|
|
$
|
6.4
|
|
|
$
|
(2.5
|
)
|
|
$
|
13.9
|
|
|
$
|
11.3
|
|
|
$
|
2.6
|
|
EA Integration Restructuring Program
During the
third quarter
of
2018
, the Company recorded
$3.6 million
of charges related to restructuring and related actions under the EA Integration Restructuring Program. Of these charges,
$2.8 million
reflect additional charges related to severance and other personnel costs.
During
the first nine months
of
2018
, the Company recorded
$12.0 million
of charges related to restructuring and related actions under the EA Integration Restructuring Program. Of these charges: (a)
$11.6 million
were recorded in restructuring charges and included
$12.7 million
of severance and other personnel costs, offset by a $
1.1 million
reduction in lease termination costs; and (b) $
0.4 million
were recorded in cost of sales.
REVLON, INC AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(all tabular amounts in millions, except share and per share amounts)
As of
September 30, 2018
, the Company anticipates recognizing approximately
$90 million
to
$95 million
of total pre-tax restructuring and related charges consisting of: (i) approximately
$70 million
to
$75 million
of employee-related costs, including severance, retention and other contractual termination benefits; (ii) approximately
$10 million
of lease termination costs; and (iii) approximately
$10 million
of other related charges.
For further discussion on the EA Integration Restructuring Program and the Company's other restructuring initiatives, see Note
2
, "Restructuring Charges."
Loss on disposal of minority investment:
The table below shows the Company's disposal of investment loss for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2018
|
|
2017
|
|
Change
|
|
2018
|
|
2017
|
|
Change
|
Loss on disposal of minority investment
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
20.1
|
|
|
$
|
—
|
|
|
$
|
20.1
|
|
The
$20.1 million
loss on disposal of minority investment in the
nine months ended September 30,
2018
, of which $18.6 million was non-cash, related to the write-off of the Company’s minority investment in a licensee after agreeing to wind-down the contract and revert the trademark rights to the Company following a brief transition period. See Note 1, "Description of Business and Summary of Significant Accounting Policies," for further information.
Interest expense:
The table below shows the Company's interest expense for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2018
|
|
2017
|
|
Change
|
|
2018
|
|
2017
|
|
Change
|
Interest expense
|
$
|
46.4
|
|
|
$
|
38.6
|
|
|
$
|
7.8
|
|
|
$
|
129.1
|
|
|
$
|
110.3
|
|
|
$
|
18.8
|
|
The
$7.8 million
increase
in interest expense in the
third quarter
of
2018
, as compared to the
third quarter
of
2017
, and the
$18.8 million
increase
in interest expense in
the first nine months
of
2018
, as compared to
the first nine months
of
2017
, were primarily due to higher average interest rates and higher debt balances resulting from the Asset-Based Term Facility entered into during the third quarter of 2018, as well as higher borrowings under the 2016 Revolving Credit Facility.
Foreign currency losses (gains), net:
The table below shows the Company's foreign currency losses (gains), net for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2018
|
|
2017
|
|
Change
|
|
2018
|
|
2017
|
|
Change
|
Foreign currency losses (gains), net
|
$
|
1.1
|
|
|
$
|
(3.1
|
)
|
|
$
|
4.2
|
|
|
$
|
10.7
|
|
|
$
|
(16.8
|
)
|
|
$
|
27.5
|
|
The
$1.1 million
in foreign currency losses, net, during the
third quarter
of
2018
, compared to
$3.1 million
in foreign currency gains, net, during the
third quarter
of
2017
, was primarily driven by the net unfavorable impact of the revaluation of certain U.S. Dollar denominated intercompany payables and foreign currency denominated receivables.
The
$10.7 million
in foreign currency losses, net, during
the first nine months
of
2018
, compared to
$16.8 million
in foreign currency gains, net, during
the first nine months
of
2017
, was primarily driven by the net unfavorable impact of the revaluation of certain U.S. Dollar denominated intercompany payables and foreign currency denominated receivables.
REVLON, INC AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(all tabular amounts in millions, except share and per share amounts)
Benefit from income taxes:
The table below shows the Company's benefit from income taxes for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2018
|
|
2017
|
|
Change
|
|
2018
|
|
2017
|
|
Change
|
Benefit from income taxes
|
$
|
(38.7
|
)
|
|
$
|
(10.8
|
)
|
|
$
|
(27.9
|
)
|
|
$
|
(43.1
|
)
|
|
$
|
(37.8
|
)
|
|
$
|
(5.3
|
)
|
The $
27.9 million
increase in the Company's benefit from income taxes in the
third quarter
of
2018
, as compared to the
third quarter
of
2017
, was primarily due: (i) to the increased loss from continuing operations before income taxes; (ii) the mix and level of earnings; and (iii) the net changes resulting from the enactment of the Tax Act, including (a) the reduction of the U.S. federal income tax rate (which provided for less of a benefit on the Company’s year-to-date loss), (b) the U.S. tax on the Company’s foreign earnings under the GILTI provisions of the Tax Act (adjusted to account for the New IRS Regs), (c) the limitation on interest deductions (which resulted in a deferred deduction on which the Company has a full valuation allowance), and (d) a reduced deduction for executive compensation under Section 162(m).
The
$5.3 million
increase in the Company's benefit from income taxes in
the first nine months
of
2018
, as compared to
the first nine months
of
2017
, was primarily due: (i) to the increased loss from continuing operations before income taxes; (ii) the mix and level of earnings; and (iii) the net changes resulting from the Tax Act, including (a) the reduction of the U.S. federal income tax rate (which provided for less of a tax benefit on the Company's year-to-date loss), (b) the U.S. tax on the Company's foreign earnings under the GILTI provisions of the Tax Act (adjusted to account for the New IRS Regs), (c) the limitation on interest deductions (which resulted in a deferred deduction on which the Company has a full valuation allowance), and (d) a reduced deduction for executive compensation under Section 162(m), partially offset by the impact of reducing the Company's liability under APB 23.
The Company's effective tax rate for the
three months ended September 30, 2018
was higher than the federal statutory rate of 21% as a result of nondeductible expenses for interest and executive compensation, as well as the U.S. taxation of the Company's foreign earnings under the GILTI provisions of the Tax Act (adjusted to account for the New IRS Regs). See Note
11
, "Income Taxes," for a further discussion of the impact of the Tax Act on the Company's provision for income taxes.
The Company's effective tax rate for the
nine months ended September 30, 2018
was lower than the federal statutory rate of 21% as a result of nondeductible expenses for interest and executive compensation, as well as the U.S. taxation of the Company's foreign earnings under the GILTI provisions of the Tax Act (adjusted to account for the New IRS Regs), partially offset by the impact of reducing the Company's liability under APB 23. See Note
11
, "Income Taxes," for a further discussion of the impact of the Tax Act on the Company's provision for income taxes.
The Company expects that its tax provision and effective tax rate in any individual quarter and year-to-date period will vary and may not be indicative of the Company's tax provision and effective tax rate for the full year.
REVLON, INC AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(all tabular amounts in millions, except share and per share amounts)
Financial Condition, Liquidity and Capital Resources
At
September 30, 2018
, the Company had a liquidity position of
$87.1 million
, consisting of: (i)
$61.8 million
of unrestricted cash and cash equivalents; (ii)
$39 million
in available borrowing capacity under the 2018 Senior Line of Credit Facility, which had
$11 million
outstanding at such date; (iii)
$1 million
in available borrowing capacity under Products Corporation's 2016 Revolving Credit Facility; and less (iv)
$14.7 million
of outstanding checks. Under the 2016 Revolving Credit Facility, as Products Corporation’s consolidated fixed charge coverage ratio at
September 30, 2018
was less than
1.0
to 1.0, it was required to maintain a
$44.1 million
Liquidity Amount (as defined in Note
7
, "Long-Term Debt") at such date. Solely for the purposes of calculating the Liquidity Amount, the borrowing base can exceed the Revolving Commitments subject to a cap of
105%
of the Commitments. Since the borrowing base at
September 30, 2018
exceeded the aforementioned cap, the
$1.0 million
of available borrowing capacity was calculated based on the borrowing base of
$463.5 million
, less
$10.1 million
of outstanding and undrawn letters of credit, less
$408.3 million
of borrowings under the 2016 Revolving Credit Facility at such date; and less maintenance of
$44.1 million
Liquidity Amount.
In April 2018, Products Corporation amended the 2016 Revolving Credit Facility (the "Revolver Amendment"), as a result of which the borrowing base under the 2016 Revolving Credit Facility was increased to approximately
$385 million
. In
June 2018
, Products Corporation obtained the
$50 million
2018 Senior Line of Credit Facility from MacAndrews & Forbes Incorporated. In July 2018, certain of the Company’s subsidiaries entered into the Asset-Based Term Agreement with Citibank, N.A., acting as administrative agent and collateral agent, which provides the Company with a euro-denominated senior secured asset-based term loan facility in an aggregate principal amount of
€77 million
, which was fully drawn on the closing date. See Note
7
, "Long Term Debt" for information regarding the April 2018 Revolver Amendment to the 2016 Revolving Credit Facility, the 2018 Senior Line of Credit Facility and the Asset-Based Term Agreement.
The Company's available liquidity as of October 31, 2018 was approximately $113 million, consisting of: (i) $67 million of unrestricted cash and cash equivalents; (ii) $40 million in available borrowing capacity under the 2018 Senior Line of Credit Facility (which had $10 million drawn as of such date); (iii) $12 million in available borrowing capacity under the 2016 Revolving Credit Facility (which had $397.3 million drawn at such date); and less (iv) $6 million of outstanding checks. The Company has continued to repatriate cash to the U.S. using tax-effective methods as part of continuing to effectively manage its working capital needs.
The Company’s foreign operations held
$52.6 million
out of its total
$61.8 million
in cash and cash equivalents as of
September 30, 2018
. The cash held by the Company’s foreign operations is primarily used to fund such operations. The Company regularly assesses its cash needs and the available sources of cash to fund these needs. As part of this assessment, the Company determines the amount of foreign earnings, if any, that it intends to repatriate to help fund its domestic cash needs, including for the Company’s debt service obligations, and pays applicable U.S. income and foreign withholding taxes, if any, on such earnings to the extent repatriated, and otherwise records a tax liability for the estimated cost of repatriation in a future period. During
2018
, the Company has continued to repatriate funds to the U.S. through the settlement of historical loans and payables due from certain foreign subsidiaries. The Company believes that the cash generated by its domestic operations, cash on hand (including, without limitation, cash provided by the Asset-Based Term Facility), availability under the 2016 Revolving Credit Facility, the 2018 Senior Line of Credit Facility and other permitted lines of credit, as well as the option to further settle intercompany loans and payables with certain foreign subsidiaries, should be sufficient to meet its domestic liquidity needs for at least the next 12 months. Therefore, the Company currently anticipates that restrictions and/or taxes on repatriation of foreign earnings will not have a material effect on the Company’s liquidity during such period.
In December 2017, the U.S. government enacted the Tax Act, which made broad and complex changes to the U.S. tax code, including a one-time transition tax on certain non-U.S. earnings, the current U.S. taxation of certain foreign earnings in 2018 and following years and limitations on tax deductions for interest expense in 2018 and following years. The Company currently expects that it will not have a transition tax liability due to its deficit in foreign earnings as of the applicable measurement dates, and that the limitation on interest deductibility will not impact the Company's 2018 federal cash taxes due to its net operating loss carryover position. As a result, the Company currently expects that the Tax Act will not have a material impact on its cash taxes or liquidity in 2018. See Note
11
, "Income Taxes" in this Form 10-Q, as well as Note 16, "Income Taxes," to the Consolidated Financial Statements and Item 1A. Risk Factors - "U.S. income tax reform efforts could have a material impact on the Company's financial condition, results of operations and/or cash flows" in Revlon's 2017 Form 10-K for a further discussion.
Changes in Cash Flows
As of
September 30, 2018
, the Company had cash, cash equivalents and restricted cash of
$62.5 million
, compared with
$87.4 million
at
December 31, 2017
. The following table summarizes the Company’s cash flows from operating, investing and financing activities for the periods presented:
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|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
2018
|
|
2017
|
Net cash used in operating activities
|
$
|
(296.7
|
)
|
|
$
|
(274.2
|
)
|
Net cash used in investing activities
|
(41.6
|
)
|
|
(69.5
|
)
|
Net cash provided by financing activities
|
316.6
|
|
|
226.7
|
|
Effect of exchange rate changes on cash and cash equivalents
|
(3.2
|
)
|
|
9.4
|
|
Net decrease in cash, cash equivalents and restricted cash
|
(24.9
|
)
|
|
(107.6
|
)
|
Cash, cash equivalents and restricted cash at beginning of period
|
87.4
|
|
|
186.8
|
|
Cash, cash equivalents and restricted cash at end of period
|
$
|
62.5
|
|
|
$
|
79.2
|
|
Operating Activities
Net cash used in operating activities was
$296.7 million
and
$274.2 million
for
the first nine months
of
2018
and
2017
, respectively. The increase in cash used in
the first nine months
of
2018
, compared to
the first nine months
of 2017, was primarily driven by a higher net loss as a result of lower net sales, partially offset by favorable working capital changes compared to the prior year period.
Investing Activities
Net cash used in investing activities was
$41.6 million
and
$69.5 million
for
the first nine months
of
2018
and
2017
, respectively, which was entirely comprised of capital expenditures. Capital expenditures in
the first nine months
of
2018
included approximately
$11.2 million
for Elizabeth Arden integration-related investments.
Financing Activities
Net cash provided by financing activities was
$316.6 million
and
$226.7 million
for
the first nine months
of
2018
and
2017
, respectively.
Net cash provided by financing activities for
the first nine months
of
2018
primarily included:
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|
•
|
$251.3 million
of borrowings under the 2016 Revolving Credit Facility; and
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|
|
•
|
$89.4 million
of borrowings under the Asset-Based Term Facility;
|
with the foregoing partially offset by:
|
|
•
|
$13.5 million
of repayments under the 2016 Term Loan Facility.
|
Net cash provided by financing activities for
the first nine months
of
2017
primarily included:
|
|
•
|
$243.9 million of borrowings under the 2016 Revolving Credit Facility;
|
with the foregoing partially offset by:
|
|
•
|
$13.5 million of repayments under the 2016 Term Loan Facility.
|
Long-Term Debt Instruments
See discussion above regarding the Revolver Amendment, the 2018 Senior Line of Credit Facility and the Asset-Based Term Facility. See also Note
7
, "Long Term Debt" for information regarding these facilities. For further detail regarding Products Corporation's long-term debt instruments, see Note 11, "Long-Term Debt," to the Consolidated Financial Statements, as well as "Management's Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition, Liquidity and Capital Resources," in Revlon's 2017 Form 10-K.
Covenants
Products Corporation was in compliance with all applicable covenants under the 2016 Credit Agreements, the 2018 Senior Line of Credit Agreement and the Asset-Based Term Facility as of
September 30, 2018
. As of
September 30, 2018
, the aggregate principal amounts outstanding and availability under Products Corporation’s various revolving credit facilities were as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitment
|
|
Borrowing Base
|
|
Aggregate principal amount outstanding at September 30, 2018
|
|
Availability at September 30, 2018
|
Tranche A of the 2016 Revolving Credit Facility
|
$
|
400.0
|
|
|
$
|
433.8
|
|
|
$
|
366.8
|
|
|
(a)N/A
|
|
Tranche B of the 2016 Revolving Credit Facility
|
41.5
|
|
|
44.3
|
|
|
41.5
|
|
|
N/A
|
|
Total Tranche A& B of the 2016 Revolving Credit Facility
(a)
|
441.5
|
|
|
478.1
|
|
|
408.3
|
|
|
$
|
1.0
|
|
2018 Senior Line of Credit Facility
|
50.0
|
|
|
N/A
|
|
|
11.0
|
|
|
39.0
|
|
(a)
Availability at
September 30, 2018
is based upon the calculated borrowing base (capped at
105%
of the respective Revolving Commitments) of
$463.5 million
, less
$10.1 million
of outstanding undrawn letters of credit and
$408.3 million
then drawn. As Products Corporation’s consolidated fixed charge coverage ratio at
September 30, 2018
was less than
1.0
to 1.0, it was required to maintain availability under the 2016 Revolving Credit Facility in an amount in excess of the
$44.1 million
Liquidity Amount at such date, as a result of which the Company had of the
$45.1 million
of availability under the 2016 Revolving Credit Facility, approximately
$1.0 million
in available borrowing capacity under such facility as of
September 30, 2018
.
Products Corporation was in compliance with all applicable covenants under its Senior Notes Indentures as of
September 30, 2018
, with there being
$500 million
and
$450 million
in aggregate principal amount outstanding under the
5.75%
Senior Notes and
6.25%
Senior Notes, respectively, as of
September 30, 2018
. As Products Corporation’s consolidated fixed charge coverage ratio at
September 30, 2018
was less than
1.0
to 1.0, it was required to maintain availability under the 2016 Revolving Credit Facility in an amount in excess of the
$44.1 million
Liquidity Amount at such date, as a result of which the Company had approximately
$1.0 million
in available borrowing capacity under the 2016 Revolving Credit Facility as of
September 30, 2018
.
Sources and Uses
The Company’s principal sources of funds are expected to be operating revenues, cash on hand and funds that may be available from time to time for borrowing under the 2016 Revolving Credit Facility, the 2018 Senior Line of Credit Facility and other permitted lines of credit. The 2016 Credit Agreements, the Senior Notes Indentures and the Asset-Based Term Agreement contain certain provisions that by their terms limit Products Corporation's and its subsidiaries’ ability to, among other things, incur additional debt.
The Company’s principal uses of funds are expected to be the payment of operating expenses, including payments in connection with the Company's synergy and integration programs related to the Elizabeth Arden Acquisition (including, without limitation, for the EA Integration Restructuring Program); purchases of permanent wall displays; capital expenditure requirements; debt service payments and costs; cash tax payments; pension and other post-retirement benefit plan contributions; payments in connection with the Company’s restructuring programs; severance not otherwise included in the Company’s restructuring programs; business and/or brand acquisitions (including, without limitation, through licensing transactions), if any; debt and/or equity repurchases, if any; costs related to litigation; and payments in connection with discontinuing non-core business lines and/or exiting and/or entering certain territories and/or channels of trade.
The Company’s cash contributions to its pension and post-retirement benefit plans in
the first nine months
of
2018
were
$6.1 million
. The Company expects that cash contributions to its pension and post-retirement benefit plans will be approximately
$10 million
in the aggregate for 2018. The Company’s cash taxes paid in
the first nine months
of
2018
were
$11.7 million
. The Company expects to pay cash taxes of approximately
$15 million
to
$20 million
in the aggregate during 2018. In December 2017, the U.S. government enacted the Tax Act, which made broad and complex changes to the U.S. tax code, including a one-time transition tax on certain non-U.S. earnings, the current U.S. taxation of certain foreign earnings in 2018 and following years, and limitations on tax deductions for interest expense in 2018 and following years. The Company currently expects that it will not have a transition tax liability due to its deficit in foreign earnings as of the applicable measurement dates, and that the limitation on interest deductibility will not impact the Company's 2018 federal cash taxes due to its net operating loss carryover position. As a result, the Company currently expects that the Tax Act will not have a material impact on its cash taxes or liquidity in 2018. See Note
11
, "Income Taxes" in this Form 10-Q, as well as Note 16, "Income Taxes," to the Consolidated Financial Statements and Item 1A. Risk Factors - "U.S. income tax reform efforts could have a material impact on the Company's financial condition, results of operations and/or cash flows" in Revlon's 2017 Form 10-K for a further discussion.
The Company’s purchases of permanent wall displays and capital expenditures in
the first nine months
of
2018
were
$57 million
and
$41.6 million
, respectively. Capital expenditures for
the first nine months
of
2018
included approximately
$11.2 million
of spend for the EA Integration Restructuring Program. The Company expects that purchases of permanent wall displays will be approximately
$60 million
to
$70 million
during 2018 and expects that capital expenditures will be approximately
$60 million
to
$70 million
during 2018.
The Company has undertaken, and continues to assess, refine and implement, a number of programs to efficiently manage its working capital, including, among other things, initiatives intended to optimize inventory levels over time; centralized procurement to secure discounts and efficiencies; prudent management of trade receivables and accounts payable; and controls on general and administrative spending. In the ordinary course of business, the Company’s source or use of cash from operating activities may vary on a quarterly basis as a result of a number of factors, including the timing of working capital flows.
During February 2018, the Company launched its new ERP system in the U.S., which caused its Oxford, N.C. manufacturing facility to experience service level disruptions that had impacted the Company’s ability to manufacture certain quantities of finished goods and fulfill shipments to retail customers in the U.S. In response, the Company implemented a robust service recovery plan to remediate the decline in customer service levels resulting from the launch of the new ERP system. As of
September 30, 2018
, the Oxford, N.C. manufacturing facility was operating at pre-SAP levels and the Company was continuing to re-fill inventories across its retail partners, particularly internationally.
The Company continues to believe that its current sources of liquidity, consisting of operating revenues, cash on hand (including, without limitation, cash provided by the Asset-Based Term Facility) and funds that may be available from time to time for borrowing under the 2016 Revolving Credit Facility, the 2018 Senior Line of Credit and other permitted lines of credit, are sufficient. See Note
7
, "Long Term Debt" for information regarding the 2016 Revolving Credit Facility, the 2018 Senior Line of Credit Facility, the April 2018 Revolver Amendment to the 2016 Revolving Credit Facility and the Asset-Based Term Facility. See also Item 1A. "Risk Factors" in Revlon's 2017 Form 10-K for further discussion regarding the Company’s implementation of its new ERP system and those related to the Company’s substantial indebtedness.
Continuing to execute the Company’s business initiatives could include taking advantage of additional opportunities to reposition, repackage or reformulate one or more brands or product lines, launching additional new products, acquiring businesses or brands (including, without limitation, through licensing transactions), divesting or discontinuing non-core business lines (which may include exiting certain territories), further refining the Company’s approach to retail merchandising and/or taking further actions to optimize its manufacturing, sourcing and organizational size and structure, including optimizing the Elizabeth Arden Acquisition. Any of these actions, the intended purpose of which would be to create value through improving the Company's financial performance, could result in the Company making investments and/or recognizing charges related to executing against such opportunities. Any such activities may be funded with operating revenues, cash on hand (including, without limitation, cash provided by the Asset-Based Term Facility), funds that may be available from time to time under the 2016 Revolving Credit Facility, the 2018 Senior Line of Credit, other permitted lines of credit and/or other permitted additional sources of capital, which actions could increase the Company’s total debt.
The Company may also, from time-to-time, seek to retire or purchase its outstanding debt obligations and/or equity in open market purchases, block trades, privately negotiated purchase transactions or otherwise and may seek to refinance some or all of its indebtedness based upon market conditions. Any such retirement or purchase of debt and/or equity may be funded with operating cash flows of the business or other sources and will depend upon prevailing market conditions, liquidity requirements, contractual restrictions and other factors, and the amounts involved may be material.
The Company expects that operating revenues, cash on hand (including, without limitation, cash provided by the Asset-Based Term Facility) and funds that may be available from time-to-time for borrowing under the 2016 Revolving Credit Facility, the 2018 Senior Line of Credit and other permitted lines of credit will be sufficient to enable the Company to pay its operating expenses for 2018, including payments in connection with the Company's synergy and integration programs related to the Elizabeth Arden Acquisition, purchases of permanent wall displays, capital expenditures, debt service payments and costs, cash tax payments, pension and other post-retirement plan contributions, payments in connection with the Company’s restructuring programs, severance not otherwise included in the Company’s restructuring programs, business and/or brand acquisitions (including, without limitation, through licensing transactions), if any, debt and/or equity repurchases, if any, costs related to litigation, discontinuing non-core business lines and/or entering and/or exiting certain territories and/or channels of trade.
There can be no assurance that available funds will be sufficient to meet the Company’s cash requirements on a consolidated basis, as, among other things, the Company’s liquidity can be impacted by a number of factors, including its level of sales, costs and expenditures, as well as accounts receivable and inventory, which serve as the principal variables impacting the amount of liquidity available under Products Corporation’s 2016 Revolving Credit Facility and the Asset-Based Term Facility. For example, subject to certain exceptions, loans under the Asset-Based Term Facility must be prepaid to the extent that outstanding loans exceed the borrowing base, consisting of accounts receivable and inventory.
If the Company’s anticipated level of revenues is not achieved because of, among other things, decreased consumer spending in response to weak economic conditions or weakness in the consumption of beauty care products in one or more of the Company's segments; adverse changes in foreign currency exchange rates, foreign currency controls and/or government-mandated pricing controls; decreased sales of the Company’s products as a result of increased competitive activities by the Company’s competitors and/or decreased performance by third-party suppliers, whether due to shortages of raw materials or otherwise; changes in consumer purchasing habits, including with respect to retailer preferences and/or sales channels, such as due to the consumption declines in core beauty categories in the mass retail channel in North America, which continues to have a negative impact on net sales of
Revlon
color cosmetics,
Almay
color cosmetics,
SinfulColors
color cosmetics and
Mitchum
anti-perspirant deodorant products; inventory management by the Company's customers; space reconfigurations or reductions in display space by the Company's customers; retail store closures in the brick-and-mortar channels where the Company sells its products, as consumers continue to shift purchases to online and e-commerce channels; changes in pricing, marketing, advertising and/or promotional strategies by the Company's customers; or less than anticipated results from the Company’s existing or new products or from its advertising, promotional, pricing and/or marketing plans; or if the Company’s expenses, including, without limitation, for synergy and integration programs related to the Elizabeth Arden Acquisition, capital expenditures, restructuring and severance costs, acquisition and integration costs, costs related to litigation, advertising, promotional and marketing activities or for sales returns related to any reduction of space by the Company's customers, product discontinuances or otherwise, exceed the anticipated level of expenses, the Company’s current sources of funds may be insufficient to meet the Company’s cash requirements.
Any such developments, if significant, could reduce the Company’s revenues and operating income and could adversely affect Products Corporation’s ability to comply with certain financial and/or other covenants under the 2016 Credit Agreements, the Senior Notes Indentures, the 2018 Senior Line of Credit Agreement and/or the Asset-Based Term Agreement and in such event the Company could be required to take measures, including, among other things, reducing discretionary spending. (See Item 1A. "Risk Factors" in Revlon's 2017 Form 10-K for further discussion of certain risks associated with the Company's business and indebtedness.)
Derivative Fi
nancial Instruments
Foreign Currency Forward Exchange Contracts
Products Corporation enters into FX Contracts from time-to-time primarily for the purpose of hedging anticipated inventory purchases and certain intercompany payments denominated in currencies other than the local currencies of the Company’s foreign and domestic operations and generally have maturities of less than one year. At
September 30, 2018
and
December 31, 2017
, the U.S. Dollar notional amount of the FX Contracts outstanding were
nil
and
$147.1 million
, respectively. The FX Contracts outstanding had a nil fair value at
September 30, 2018
.
Interest Rate Swap Transaction
In November 2013, Products Corporation executed a forward-starting floating-to-fixed interest rate swap transaction (the "2013 Interest Rate Swap") that, at its inception, was based on a notional amount of $400 million in respect of indebtedness under the Old Acquisition Term Loan. The 2013 Interest Rate Swap expired in May 2018. Refer to Note
9
, "Financial Instruments" for more information on this interest rate swap transaction.
Credit Risk
Exposure to credit risk in the event of nonperformance by any of the counterparties to the Company's outstanding hedging instruments is limited to the gross fair value of the derivative instruments in asset positions, which totaled
$0.1 million
and
$0.6 million
as of
September 30, 2018
and
December 31, 2017
, respectively. The Company attempts to minimize exposure to credit risk by generally entering into derivative contracts with counterparties that have investment-grade credit ratings and are major financial institutions. The Company also periodically monitors any changes in the credit ratings of its counterparties. Given the current credit standing of the counterparties to the Company's derivative instruments, the Company believes the risk of loss arising from any non-performance by any of the counterparties under these derivative instruments is remote.
REVLON, INC AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(all tabular amounts in millions, except share and per share amounts)
Disclosures about Contractual Obligations and Commercial Commitments
As of
September 30, 2018
, there were no material changes to the Company's total contractual cash obligations, as set forth in the contractual obligations and commercial commitments disclosure included in Revlon's 2017 Form 10-K, with the exception of the Company's amendment to the 2016 Revolving Credit Facility in April 2018, the 2018 Senior Line of Credit Facility entered into with MacAndrews & Forbes in June 2018 and the Asset-Based Term Facility entered into in July 2018. See Note
7
, "Long Term Debt" for information regarding the April 2018 Revolver Amendment to the 2016 Revolving Credit Facility, the 2018 Senior Line of Credit Facility and the Asset-Based Term Facility. The following table reflects the impact of these transactions on the Company's long-term debt obligations:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
Payments Due by Period
|
Contractual Obligations
|
|
Total
|
|
Less than 1 year
|
|
1-3 years
|
|
4-5 years
|
|
After 5 years
|
Long-term debt, including current portion
|
|
$
|
3,212.2
|
|
|
$
|
412.8
|
|
|
$
|
36.2
|
|
|
$
|
625.6
|
|
|
$
|
2,137.6
|
|
Interest on long-term debt
|
|
822.4
|
|
|
41.5
|
|
|
369.0
|
|
|
287.6
|
|
|
124.3
|
|
Off-Balance Sheet Transactions
The Company does not maintain any off-balance sheet transactions, arrangements, obligations or other relationships with unconsolidated entities or others that are reasonably likely to have a material current or future effect on the Company's financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Discussion of Critical Accounting Policies
For a discussion of the Company's critical accounting policies, see Revlon's 2017 Form 10-K.
Effect of Recently Issued Accounting Pronouncements
See discussion of recent accounting pronouncements in Note 1, "Description of Business and Summary of Significant Accounting Policies," to the Unaudited Consolidated Financial Statements in this Form 10-Q.
REVLON, INC. AND SUBSIDIARIES